Chapter 6

Question 1

What is money?

Answer 1

anything that is generally acceptable in making exchanges

Question 2

What is barter?

Answer 2

trade without money

Question 3

To exchange with barter, there must be?

Answer 3

double coincidence of wants

Question 4

Why did money develop?

Answer 4

because it was superior to barter

Question 5

Smith lists the commodities that evolved into money:

Answer 5

1) labor (the original medium of exchange)
2) cattle (early societies)
3) salt (early societies, including Rome)
4) cowry shells (India)
5) cod (Newfoundland)
6) Tobacco (early Virginia)
7) sugar (west indies)
8) iron (sparta)
9) copper (rome)
10) gold & silver (many societies throughout history)

Question 6

What are the three functions of money?

Answer 6

1) medium of exchange
2) unit of account
3) store of value

Question 7

What is the medium of exchange?

Answer 7

means that something is generally accepted and convenient for exchange

Question 8

What is unit of account?

Answer 8

each unit of it is “worth” the same amount

Question 9

What is the store of value?

Answer 9

something retains value over time

Question 10

What is the wellspring of all U.S. dollars?

Answer 10

The Federal Reserve System and the banking system

Question 11

What is liquidity?

Answer 11

the ease in which an asset can be converted to spendable form

Question 12

What is the most referenced measurement of our money supply?

Answer 12

M1 (M one) which most of us think as money

Question 13

What is M1 the sum of?

Answer 13

1) paper currency held outside of the banks
2) checking account balances
3) Travelers checks (nearly obsolete)

Question 14

What is our total income received in our economy?

Answer 14

$17.3 trillion

Question 15

When and why was the federal reserve set up?

Answer 15

1913 to be a leader and last resort to troubled banks

Question 16

What caused the great depression according many philosophers?

Answer 16

once the state came under control of banks to prevent future crisis they caused a huge economic deflation

Question 17

Who does the fed depend on?

Answer 17

The fed depends on themselves, no one else, even congress. It was intended to be a government business partnership with shared governance

Question 18

How many region district are there?

Answer 18

12

Question 19

Who makes up the board of governors?

Answer 19

• 7 governors appointed by the president with the advice and consent of the senate who serve 14 year terms
• A chairman who is appointed by the president every 4 years who must also face confirmation from the senate

Question 20

What is monetary policy?

Answer 20

The way that the fed uses the money supply to attempt to affect the economy

Question 21

What is the Federal Open Market Committee composed of:

Answer 21

1) The board of governors (7 members)
2) The president of the New York Federal Reserve Bank
3) The president of the other 11 district banks, four of whom vote at each meeting on a rotating basis
(voting against the chairman is looked down upon, so it rarely happens)

Question 22

What are the three tools of monetary policy?

Answer 22

1) Open Market Operations
2) The Required Reserve Ratio (A bank’s reserve, excess reserves)
3) The discount Rate

Question 23

What is the open market operations?

Answer 23

buying and selling U.S. government bonds from individuals and businesses who previously bought them from the U.S. government (increases the money supply)

Question 24

What is the required reserve ratio?

Answer 24

set by the fed, it is the percentage of deposits that banks can not lend out, but have to reserve

Question 25

What does a banks reserve consist of?

Answer 25

vault cash, plus the banks account with the fed
. the current required reserve ratio is 10%
. with a lower required reserve banks can led out more and vise versa
. not a part of the money supply until it is released

Question 26

What is excess reserves?

Answer 26

reserves that banks hold in excess of those the Fed requires
. at any point in time a bank can lend out its excess reserves
. not a part of the money supply until it is released

Question 27

What is the discount rate?

Answer 27

the discount rate is the interest rate that a banks pays when they have to go to the fed for a loan as the last resort which the fed sets by command

Question 28

What is the Feds target when creating money?

Answer 28

The Federal Funds Rate

Question 29

What is the Federal Funds Rate?

Answer 29

free market rate at which banks lend to other banks

Question 30

What does the Fed prefer to use?

Answer 30

open market operations

Question 31

What is the formula finding the eventual increase in the money supply is….

Answer 31

amount started with divided by the reserve ratio

Question 32

What is the general formula for the simple money multiplier

Answer 32

1 divided by the required reserve ratio

Question 33

What does the value of the dollar in the domestic economy depend on?

Answer 33

how many and which goods and services it will buy

Question 34

What is the consumer price index? (CPI)

Answer 34

n

Question 35

Each month what does the Bureau of Labor statistics do?

Answer 35

they measure the price of 200 goods that a typical consumer buys (the measurement is a weighted average of the prices)

Question 36

What is the PCE Price index?

personal consumption expenditures index

Answer 36

excludes food and fuel, which make up 20% of household spending

Question 37

How do you find the price index?

Answer 37

PI= (cost of market basket in focal period) divided by (cost of market basket in base period) X 100

Question 38

If the base period is also the period of focus than the calculation yields…

Answer 38

100

Question 39

How do you find the inflation from year one to year two?

Answer 39

inflation= (CPI year 2 divided by CPI year 1) -1

Question 40

What is fiat money?

Answer 40

money that doesn’t have any other use

Question 41

What is commodity money?

Answer 41

money that has other uses