Exam 3 - Chapter 15

Question 1

What are 2 ways money can be better than other money?

Answer 1

• Stability of value

- Convenience (gold coins vs paper dollar — dollar easier to carry)

Question 2

M1

Answer 2

Public savings + demand deposits + travelers checks

Question 3

M2

Answer 3

M1 + savings accounts + savings deposits + money market mutual funds + small time deposits

Question 4

3 reasons for money?

Answer 4

Store of Value
-represents certain amount of purchasing power

Medium of Exchange

Unit of Account
-money used to compare goods/services

Question 5

What is Commodity-backed money?

Answer 5

Money that can be exchanged for in a fixed amount for something else (gold)

Question 6

What is money that cannot be exchanged at a fixed rate for a commodity called?

Answer 6

Fiat Money

Question 7

___ paper money made it possible for banks to create money.

Answer 7

Fractional-reserve banking

Question 8

The ___ is the ratio of money created by the lending activities of the banking system to the money created by the central bank

Answer 8

Money multiplier

Question 9

what is the Money Multiplier formula?

Answer 9

1/R

Question 10

The ___ is the institution responsible for managing the nation’s money supply and coordinating the banking system.

Answer 10

Central Bank

*Central bank is Federal Reserve in U.S.

Question 11

What is the Federal Reserve’s dual mandate?

Answer 11

• ensure price stability

- maintain full employment

Question 12

___refers to the actions made by the central bank to manage the money supply.

Answer 12

Monetary Policy

Question 13

Federal Reserve is mandated by Congress to conduct monetary policy to perform two essential functions:

Answer 13

Manage money supply

Act as lender as last resort

Question 14

The ___ is the lending facility that allows banks to borrow reserves from the Fed.

Answer 14

Discount Window

Question 15

3 tools that monetary policy can use to control the economy are?

Answer 15

inc/dec Reserve Requirement
-too powerful of tool and rarely used

Discount Window
-Federal Reserve lends money to banks at Discount Rate (rarely used)

Open-market Operations
-Federal Reserve buys/sells bonds from banks to regulate money supply

Question 16

Why is it a bad sign for banks to be borrowing money from the Federal Reserve?

Answer 16

Because banks pay Discount Rate (interest rate)

Discount Rate > Market Rate

Question 17

If the discount rate increases, than the amount of money ___

Answer 17

Decreases

Question 18

What happens to the money supply when the Federal Reserve buys/sells bonds

Answer 18

Buys Bonds
-money supply increases

Sells Bonds
-money supply decreases

Question 19

Explain the Federal Funds Rate

Answer 19

• is a interest rate

- rate at which one bank loans money to another bank so they can meet their reserve requirements

Question 20

How is the Federal Funds Rate affected when the Federal Reserve buys/sells bonds

Answer 20

Federal Reserve buys Bonds
-Federal Funds Rate decreases

Federal Reserve Sells Bonds
-Federal Funds Rate Increases

Question 21

The ___ refers to the idea that the quantity of money people want to hold is a function of the interest rate.

Answer 21

liquidity-preference model

Question 22

___ policy is when money supply is decreased to lower aggregate demand.

___ policy is when money supply is increased to raise aggregate demand.

Answer 22

Contractionary monetary

Expansionary monetary