Macro Unit 3

Question 1

Money

Answer 1

the set of assets in the economy that people use to buy goods and services

Question 2

3 functions of money

Answer 2

1. used as a medium of exchange
2. used as a unit of account
3. used as a store of value

Question 3

Medium of exchange

Answer 3

an item buyers give to sellers when they want to purchase goods and services

Question 4

Unit of account

Answer 4

the yardstick people use to post prices and record debts

Question 5

Store of value

Answer 5

an item that people can use to transfer purchasing power from the present to the future

Question 6

Liquidity

Answer 6

the ease of an asset to be converted into the economy’s medium of exchange

Question 7

Intrinsic value

Answer 7

something that has worth even when not used as moeny

Question 8

Commdity money

Answer 8

money with intrinsic value (ex. gold)

Question 9

Fiat money

Answer 9

money without intrinsic value that is used as money because of a government decree (ex. the U.S. dollar)

Question 10

Demand deposits (checkable deposits)

Answer 10

balances in bank accounts that depositors can access by writing a check ir using a debt card
Largest portion of U.S. money supply
Most liquid money is kept in demand deposits

Question 11

M1 vs. M2 money

Answer 11

M1: most money supply, most liquid. Increases over time because the inflation goes up
M2: grows form investments

Question 12

Federal Reserve

Answer 12

central bank of the U.S.

Question 13

Money supply

Answer 13

quantity of money available in the economy

Question 14

Monetary policy

Answer 14

the setting of the money supply by policymakers in the central bank

Question 15

Assets

Answer 15

items of value in your control (money you actually have, ex. stocks, bonds, loans)

Question 16

Equity

Answer 16

used to account for the capital of a firm

Question 17

Liabilities

Answer 17

money/debts owed

Question 18

Reserves

Answer 18

deposits that banks have received but not loaned out

Question 19

Reserve ratio

Answer 19

the percent of deposits a bank must keep as reserves

Question 20

Fractional Reserve Banking

Answer 20

a banking system where the bank holds only a fraction of deposits as reserves
depositing by consumers and lending by the bank makes new money

Question 21

Money multiplier

Answer 21

the amount of money the banking system generates with each dollar of reserves
the reciprocal of the reserve ratio

Question 22

Excess reserves

Answer 22

any extra money that a bank can lend out, but has decided to keep for the time being
excess reserves REDUCE the money multiplier

Question 23

Open market operations

Answer 23

the purchase and sale of U.S. government bonds by the Fed.

Question 24

How does the Fed increase money supply?

Answer 24

the Fed tells bond traders at the NY Fed to buy bonds from the public in bond markets. The money the Fed pays for the bonds increases the number of dollars in circulation

Question 25

How does the Fed decrease money supply?

Answer 25

The Fed sells government bonds to the public in the nation’s bond markets. The public buys the bonds with currency and bank deposits, reducing the amount of money in circulation

Question 26

Interest rates

Answer 26

The fee paid to borrow money OR the compensation received for lending money

Question 27

Why are loans needed?

Answer 27

To invest in things

Investment is the portion most affected in GDP

Question 28

Bond

Answer 28

A certificate that represents a loan from a lender to a borrower

Question 29

Lender

Answer 29

Buys bonds and collects interest

Question 30

Borrower

Answer 30

Sells bond and collects interest

Question 31

Why do governments and companies issue bonds?

Answer 31

To raise money or cover debts

Question 32

Savings bond

Answer 32

Sold at a discount, yields a return through maturity

Question 33

Treasury bill

Answer 33

sold at a discount, yields a return through maturity. Take longer to mature, but is cheaper to buy, so it will yield more

Question 34

Relationship between bond prices and interest rates

Answer 34

Bond prices and interest rates are inversely related

Question 35

Rule of 70

Answer 35

Money will double every 70/x years, where x=interest rate

Question 36

The Fed

Answer 36

Central job of the U.S.

Main jobs are to supervise and ensure health of commercial banks and is the lender of last resort

Question 37

Federal Open Market Committee (FOMC)

Answer 37

Enacts monetary policy (the changes in money supply used to manage demand)

Question 38

Contractionary vs expansionary money supply

Answer 38

Contractionary reduces the money supply

Expansionary increases the money supply

Question 39

3 ways the Fed controls money supply

Answer 39

1. Reserve requirements
2. Discount rate
3. Open market operations

Question 40

Reserve requirements

Answer 40

Changes bank’s reserve requirement minimum
Changes the money multiplier
If reserve requirement decreases,money supply increases
If reserve requirement increases, money supply decreases

Question 41

Discount rate

Answer 41

Rate at which the Fed lends money to banks. Banks use the discount rate to get short term liquidity. Fed raises or lowers interest rates
When the discount rate goes up, money supply goes down
When the discount rate goes down, money supply goes up

Question 42

Open market operations

Answer 42

Buying and selling U.S. bonds by the Fed
Sets the federal funds rate (short term interest rate for overnight loans)
Feds purchase of bonds is set by supply and demand for interbank loans
When bonds are sold, money supply decreases
When bonds are bought, money supply increases