Chapter 6 class questions

Question 1

what is money

Answer 1

any general accepted means of exchange

Question 2

double coincidence of wants

Answer 2

with barter, find what he wants and find something he has

Question 3

how does money evolve from barter?

Answer 3

in barter, eventually some goods become more acceptable in making exchanges

Question 4

what is wellspring of all US dollars?

Answer 4

fed reserve and banking system

Question 5

what is liquidity

Answer 5

ease by which an asset can be converted to a spendable form

Question 6

what are the parts of M1

Answer 6

currency help outside bonds, checking account, and travelers checks

Question 7

how big is M1

Answer 7

2.5 tril

Question 8

why was the fed created?

Answer 8

to be a lender of last resort to prevent banking crises

Question 9

t/f explain: the feds early record was not good

Answer 9

true, caused deflation that economy believed caused the great depression

Question 10

t/f explain: if congress wanted to end the fed, they could refuse to fund it

Answer 10

false, they fund themselves

Question 11

t/f explain: the president runs the fed

Answer 11

false, board of 7 governors, appointed by the president to serve 14 year terms chair is appointed for 4 year terms. all confirmed by the senate

Question 12

who is on the federal open market committee?

Answer 12

7 govs., New York pres, 11 district bank pres, 4 of whom vote at meetings on rotating basis

Question 13

what are the 3 tools of monetary policy?

Answer 13

open market operations, required reserve ratio, the discount rate

Question 14

what is open market operations?

Answer 14

buying and selling bonds to affect money supply

Question 15

how could open market transfers lower money supply

Answer 15

if FOMC sells bonds, bonds flow into the economy and money flows out of the economy

Question 16

what is the federal reserve ratio?

Answer 16

% of deposits bank cannot lend but must hold as reserve

Question 17

2 forms can bank hold reserves

Answer 17

vault cash and in account with the fed

Question 18

if the fed lowers required reserve ratio what will happen to the money supply?

Answer 18

money supply will increase because banks can lend more, moves money from reserve which is not part of money supply into currency and individual accounts

Question 19

discount rate

Answer 19

interest rate which banks lend to each other

Question 20

what is the federal funds rate?

Answer 20

free market rate which banks lend to each other determined by supply and demand of money in the system

Question 21

news media says fed lower int rate by 1% today what does that really mean?

Answer 21

FOMC plans to increase the money supply until the fed funds rate falls by 1%

Question 22

which of the 3 tools does monetary policy prefer?

Answer 22

open market operations. the required reserve ratio is dangerous and the discount rate is weak

Question 23

what si the definition of the money multiplier?

Answer 23

1/ required reserve ratio

Question 24

how can one measure the value of a dollar in domestic economy

Answer 24

amount of goods it will buy (services and resources)

Question 25

what is the formula for price index?

Answer 25

PI: cost of market basket in period of interest/ cost of market basket in period base per **100

Question 26

if price index fro part year is 200. what is straightforward interpretation

Answer 26

if $100 bought $100 worth of stuff in base year, it now takes $200 to buy same stuff

Question 27

definition of inflation rate

Answer 27

% change in price index, usually over one year