Lectures 19 and 21

Question 1

What is money?

Answer 1

A (near) perfectly liquid asset

Question 2

What are the functions of money?

Answer 2

Medium of exchange
Unit of Account
Store of value
Standard of deferred payment

Question 3

What function of money solves the “double coincidences of wants” problem?

Answer 3

Medium of Exchange

Question 4

What does unit of account mean?

Answer 4

A common belief as to what a dollar is worth

Question 5

What does the store of value mean?

Answer 5

The ability to save the value and spend it at a later time

Question 6

What does the money supply refer to?

Answer 6

to the total amount of money in circulation

Question 7

What are the two measures of the money supply?

Answer 7

M1 and M2

Question 8

What is included in M1?

Answer 8

Cash and coins
Checking account deposits
Travelers’ checks

Question 9

What does the M1 measure of supply need to be?

Answer 9

perfectly spendable

Question 10

What is the smallest measure of the money supply?

Answer 10

M1 measure of money supply

Question 11

What is in the M2 measure of the money supply?

Answer 11

Everything in M1
Savings account deposits
Time deposits
Money market mutual funds

Question 12

What are the depository institutions?

Answer 12

commercial banks
credit unions
savings banks

Question 13

What kind of banking do commercial banks use?

Answer 13

Fractional reserve banking

Question 14

Who (partially) owns credit unions?

Answer 14

Account holders

Question 15

What are the roles of depository institutions?

Answer 15

Create liquidity
Pool Risk
reduce cost of borrowing
reduce cost of monitoring borrowers

Question 16

What is monetary policy?

Answer 16

changing interest rates/money supply

Question 17

Who conducts monetary policy?

Answer 17

The central bank (The federal reserve)

Question 18

What is the makeup of the Federal Reserve System?

Answer 18

board of governors
12 reigional Federal Reserve Banks
Federal Open Market Committee

Question 19

How many governors are on the Board of Governors?

Answer 19

7

Question 20

All governors on the B.G serve __ year ___ terms

Answer 20

14 year, nonrenewable terms

Question 21

Why aren’t the governors terms renewable?

Answer 21

To reduce political influence

Question 22

Who appoints the chair of the federal reserve?

Answer 22

POTUS

Question 23

How long is the term of the chair of the federal reserve?

Answer 23

4 years, renewable

Question 24

How many regional Federal Reserve banks are there?

Answer 24

12

Question 25

What makes up the Federal Open Market Committee?

Answer 25

7 governors, NY federal reserve president, 4 other reserve presidents on a rotational basis

Question 26

What are the roles of the Central Bank?

Answer 26

Conduct monetary policy Serve as the bankers' bank Serve as a lender of last resort

Question 27

What happens when a country dollarizes (besides adopting another country's currency)

Answer 27

The central bank of the dollarizing country loses control of monetary policy

Question 28

What are two ways in which a central bank might lose control of monetary policy?

Answer 28

Joining a currency union Dollarizing

Question 29

What are the monetary policy tools?

Answer 29

Open market operations Reserve Requirement Discount policy

Question 30

What are the open market policies?

Answer 30

Transactions that increase or decreases the fed's reserve rate

Question 31

What kind of open market policies are there?

Answer 31

Open market purchases and open market sales

Question 32

What happens if the reserve requirement is lowered for commercial banks?

Answer 32

Suppliable loans increase

Question 33

What is the monetary base?

Answer 33

All cash and coins plus all bank reserves

Question 34

What kind of monetary policy is open market purchases?

Answer 34

Expansionary

Question 35

What grows with a money market purchase?

Answer 35

The monetary base and the money supply grows by more

Question 36

What happens during a money market purchase?

Answer 36

Federal Reserve purchases a non-money asset from a depository institution The Fed pays by increasing the banks reserve balance The monetary base grows

Question 37

What do open market sales do?

Answer 37

Shrink the size of the monetary base and money supply

Question 38

What kind of monetary policy are market sales?

Answer 38

Contractionary