Finals Chapter 13

Question 1

In a fractional reserve banking system, banks are required

Answer 1

to keep a percentage of their deposits in reserve, then may loan out the rest.

Question 2

In a fractional reserve banking system, most of the money in the economy is created by

Answer 2

Banks making loans.

Each new loan increases the money supply.

Question 3

The nominal interest rate is

Answer 3

The money rate of interest

Question 4

The real rate of interest

Answer 4

Is the nominal rate minus the rate of inflation.

Question 5

The quantity theory of money ties the money supply

Answer 5

to prices.

• It states that an increase in the money supply will cause an equal increase in the price level.
• Economists agree that this works in the short run for large increases in M, and probably over the long run for any increase in M, but may not be accurate for small increases in M in the short term.

Question 6

Money is assumed by the quantity theory to be

Answer 6

Neutral, that is it affects prices, but not output.

Question 7

Because interest rates are tied to the money supply, an increase in the money supply

Answer 7

may lower interest rates, which increases investment and GDP, at least in the short run.

Question 8

Central banks are the government owned or sponsored banks in countries.

Answer 8

Are the government owned or sponsored banks in the country.

Question 9

The US central bank is the

Answer 9

Federal Reserve System.

Question 10

The functions of the central bank are to

Answer 10

1) be a clearing house for checks,
2) regulate the banking system,
3) serve as a bank for bankers,
4) control the money supply and interest rates, and
5) be the lender of last resort.

Question 11

The Fed controls the money supply by

Answer 11

Buying and selling government bonds.

Question 12

Buying bonds

Answer 12

Increases the money supply

Question 13

Selling bonds

Answer 13

Decreases the money supply

Question 14

The Federal Reserve System

Answer 14

Was created in 1913,
divides the country into 12 districts,
is run by a 7 person Board of Governors and
controls the money supply through an agency called the Federal Open Market Committee.

Question 15

The quantity theory of money

Answer 15

says that there is a direct relationship between the money supply in the economy and the prices of goods and services.
As the money supply increases, so will the level of prices in the economy.

Question 16

Velocity

Answer 16

The velocity of money is the average number of times each dollar is used during a given year.

Question 17

Reserves

Answer 17

In the US, banks are required to hold 12% of most deposits made. This 12% is called the required reserve ratio or reserve reserve requirement.
The bank must keep the 12% either in the bank in cash or on account at the local Federal Reserve Bank.
This money is called the banks reserves.

Question 18

Required reserve ratio

Answer 18

-In the US, banks are required to hold 12% of most deposits made. This 12% is called the required reserve ratio or reserve reserve requirement.
The bank must keep the 12% either in the bank in cash or on account at the local Federal Reserve Bank.

Question 19

Board of governors

Answer 19

The Federal Reserve System is controlled by a board of governors located in Washington D.C.
there are 7 people on the board of governors, appointed by the president and approved by the Senate for 14 year terms of office.

Question 20

District

Answer 20

The country was divided into twelve districts . Each district has a Fed bank and several branches, overseen by a Board of Directors.

Question 21

Board of directors

Answer 21

The country was divided into twelve districts .

Each district has a Fed bank and several branches, overseen by a Board of Directors.

Question 22

Federal open market committee

Answer 22

Is the body charged with control of the money supply.

Question 23

Clearing house

Answer 23

Central banks act as clearing houses for checks.
When the customer of one bank gives a check to a customer of another bank, the central bank facilitates the interaction between the banks.

Question 24

Bankers bank

Answer 24

Serves as bank for bankers

Question 25

Lender of last resort

Answer 25

Central banks are the lender of last resort. This means that the central bank is responsible for ensuring that qualified borrowers can always find money to borrow.

Question 26

Assets

Answer 26

Something you own

Question 27

Liability

Answer 27

Something you owe

Question 28

Assets =

Answer 28

Liabilities + Owners Equity

Question 29

Actual reserves

Answer 29

Total reserves of the bank.

Question 30

Required reserves

Answer 30

The amount of reserves it must keep in the bank

Question 31

Excess reserves

Answer 31

Actual reserves - Required reserves

Question 32

Money multiplier =

Answer 32

1/ required reserves ratio

Question 33

Equation of Exchange

Answer 33

MV= PQ( =GDP)
M is money supply 
V is velocity of money 
P is price level of the whole country 
Q is quantity of output ( Real GDP) produced by the nation.

Question 34

GDP=

Answer 34

Price times quantity