Chapter 6- Banking and the Federal Reserve

Question 1

What is the money supply?

Answer 1

the total quantity of money in the economy at any given time.

Question 2

Why do economist measure the money supply?

Answer 2

to help determine the activity taking place all around us in the economy.

Question 3

What is the definition of M1- money?

Answer 3

consists of coins and currency, checking accounts and traveler’s checks

Question 4

what is the definition of M2-money?

Answer 4

it is M1 + small savings accounts, money market funds and small time deposits.

Question 5

What is the definition of M3- money?

Answer 5

it is M2 + large time deposits, large money market funds and repurchase agreements.

Question 6

What does liquidity mean?

Answer 6

how easy something can be converted into cash.

Question 7

Which is most liquid?
M1
M2
M3

Answer 7

M1, M2 then M3

Question 8

Define Money

Answer 8

the portion of your wealth that you choose to hold in the form of cash or checking accounts instead of other forms of wealth that may yield an income.

Question 9

What is the demand for money?

Answer 9

the relationship between the quantity of money people want to hold and the factors that determine that quantity.

Question 10

What are the basic motives for holding money?

Answer 10

1. transaction demand for money
2. precautionary demand for money
3. Speculative demand for money
4. portfolio demand for money

Question 11

What is the demand curve for money?

Answer 11

An illustration economist use to demonstrate the demand for money.

Question 12

What type of slope does the demand curve for money have?

Answer 12

downward sloping.

Question 13

What factors lead to a shift in the demand for money curve?

Answer 13

Read GDP (+)
Price Level (+)
Expectation (-)
Transfer Costs (+)
Preferences (-)

Question 14

What year was the federal reserve founded?

Answer 14

1913 by the Federal Reserve Act

Question 15

Where does the Federal Reserve’s power come from

Answer 15

its ability to issue money.

Question 16

What is the main goal of the federal reserve?

Answer 16

to promote maximum sustainable output and employment and to promote stable prices.

Question 17

What is the federal reserve responsible for?

Answer 17

1. holding deposits of banks
2. acting as the lender of last resort to commercial banks
3. regulating the money supply
4. supervising the banking system
5. providing check-clearing services

Question 18

What are the federal reserve’s main objectives?

Answer 18

1. maximum employment
2. price stability
3. moderate interest rates

Question 19

How does the federal reserve attempt to achieve it main objectives?

Answer 19

Controlling the money supply. when the money supply changes, interest rates also change.

Question 20

Does the federal reserve bank with individuals directly.

Answer 20

no.

Question 21

What does an increase in the money supply cause?

Answer 21

a lowering of interest rates, higher levels of investment, and greater economic output.

Question 22

What does a decrease in the money supply cause?

Answer 22

higher interest rates, lower levels of investments, and lower economic output.

Question 23

When would the federal reserve want to use an expansionary monetary policy?

Answer 23

When economic growth is slow, stalled or during a recession or depression.

Question 24

When would the federal reserve want to use a contractionary monetary policy?

Answer 24

When inflation rates are too high and the economy is growing too quickly.

Question 25

Define open market operations.

Answer 25

the purchases and sales of government securities in the open market by the federal reserve.

Question 26

How does the federal reserve actually increase the money supply?

Answer 26

they purchase government bonds from the public on the open market. this increases the money supply.

Question 27

How does the federal reserve actually decrease the money supply?

Answer 27

They sell government bonds to the public in the open market. the money used in this exchange get removed form the banking system, so the money supply goes down.

Question 28

What is the money multiplier equation?

Answer 28

money multiplier = 1/the reserve ratio rate.

Question 29

What formula is used to calculate the changes in money supply?

Answer 29

Change in money supply = changes in reserves * the money multiplier.

Question 30

What is the discount rate?

Answer 30

the interest rate charges when member banks borrow directly from the federal reserve.

Question 31

what is the affect of the fed lowering the discount rate?

Answer 31

it increases excess reserves in commercial banks throughout the economy and expands the money supply.

Question 32

what is the affect of the fed raising the discount rate?

Answer 32

it decreases excess reserves in commercial banks and contracts the money supply.

Question 33

Define commercial banks

Answer 33

Also known as depository institutions that accept deposits from businesses and individuals.

Question 34

Define a savings and loan institution

Answer 34

those actually owned by its depositors and is focused on providing home loans.

Question 35

Define a credit union

Answer 35

a nonprofit institution that is usually formed to serve a specific group of people.

Question 36

Define investment banks.

Answer 36

instead of taking in deposits and lending money, investment bankers help companies raise capital through stock offerings. Also help companies with mergers and acquisitions

Question 37

Define international banking

Answer 37

can provide the same services to its customers as domestic banks, but also provide additional services. help financing trade through use of letters of credit and export credit. they also provide exchange services so that businesses can make payments in the local currency