Chapter 6 class questions Flashcards
what is money
any general accepted means of exchange
double coincidence of wants
with barter, find what he wants and find something he has
how does money evolve from barter?
in barter, eventually some goods become more acceptable in making exchanges
what is wellspring of all US dollars?
fed reserve and banking system
what is liquidity
ease by which an asset can be converted to a spendable form
what are the parts of M1
currency help outside bonds, checking account, and travelers checks
how big is M1
2.5 tril
why was the fed created?
to be a lender of last resort to prevent banking crises
t/f explain: the feds early record was not good
true, caused deflation that economy believed caused the great depression
t/f explain: if congress wanted to end the fed, they could refuse to fund it
false, they fund themselves
t/f explain: the president runs the fed
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
who is on the federal open market committee?
7 govs., New York pres, 11 district bank pres, 4 of whom vote at meetings on rotating basis
what are the 3 tools of monetary policy?
open market operations, required reserve ratio, the discount rate
what is open market operations?
buying and selling bonds to affect money supply
how could open market transfers lower money supply
if FOMC sells bonds, bonds flow into the economy and money flows out of the economy
what is the federal reserve ratio?
% of deposits bank cannot lend but must hold as reserve
2 forms can bank hold reserves
vault cash and in account with the fed
if the fed lowers required reserve ratio what will happen to the money supply?
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
discount rate
interest rate which banks lend to each other
what is the federal funds rate?
free market rate which banks lend to each other determined by supply and demand of money in the system
news media says fed lower int rate by 1% today what does that really mean?
FOMC plans to increase the money supply until the fed funds rate falls by 1%
which of the 3 tools does monetary policy prefer?
open market operations. the required reserve ratio is dangerous and the discount rate is weak
what si the definition of the money multiplier?
1/ required reserve ratio
how can one measure the value of a dollar in domestic economy
amount of goods it will buy (services and resources)
