Macro Unit 4

Question 1

The three functions of money

Answer 1

1. A medium of exchange- used to easily buy goods and services
2. A unit of account (a measure of value)- measures the value of all goods and services
3. A store of value- allows you to store purchasing power for the future

Question 2

The financial sector

Answer 2

network of institutions that link borrowers and lenders including banks, mutual funds, pension funds, and other financial intermediates.

Question 3

Assets

Answer 3

any item of economic value that you own

Question 4

Liabilities

Answer 4

anything that is owed

Question 5

Liquidity

Answer 5

the ease with which an asset can be accessed and used as a medium of exchange.

Question 6

commodity money

Answer 6

commodity money performs the function of money and has intrinsic value.

Question 7

fiat money

Answer 7

Fiat money serves as money but has no other value.

Question 8

M1 money supply

Answer 8

M1 money supply has the highest liquidity; includes currency in circulation, checking and savings accounts, and deposits in money market accounts.

Question 9

M2 money supply

Answer 9

M2 money supply is all of M1 plus time deposits and money market funds.

M2 money supply will always be larger than that of M1

Question 10

Bond

Answer 10

Bonds are loans (or official IOUs) that represent debt that the government, businesses, or individuals must repay to the lender
the bond holder has no ownership of the company

Question 11

Demand deposits

Answer 11

Money deposited in a bank in a checking account (direct deposit)

Question 12

Required reserves

Answer 12

The minimum amount of deposits banks must hold by law

Question 13

Excess reserves

Answer 13

The amount that the bank can loan out

Excess + required reserve = total reserve

Question 14

Fractional Reserve Banking

Answer 14

System where banks are forced to keep a fraction of your deposits physically at the bank in case you want to take cash out

Question 15

Balance sheet

Answer 15

A record of a banks assets and liabilities

Question 16

Owner’s equity

Answer 16

The amount of money the owner put into the company
doesn’t need to be held in reserve

Question 17

Money multiplier equation

Answer 17

1/reserve requirement

Cash in circulation=(initial deposit)(multiplier)

Question 18

Transaction demand for money

Answer 18

When people hold money for everyday transactions

Question 19

Asset demand for money

Answer 19

When people hold onto money because it is less risky than other assets (like bonds)

Question 20

Shifters in money demand

Answer 20

1. Changes in price level
2. Changes in income
3. Changes in technology

Question 21

The money market graph

Answer 21

• Shows the relationship between the supply and demand of money
• Nominal interest rate on the y-axis and quantity of money on the x axis
• Money demanded is downward sloping just like other demand graphs
• Money supplied is vertical

Question 22

Monetary policy

Answer 22

When the FED adjusts the money supply to move the economy

Question 23

Monetary base vs money supply

Answer 23

The monetary base is the money printed at the mint (includes money in circulation and demand deposits) whereas the money supply is the money in circulation after the multiplier effect (includes money in circulation and total reserves)

Question 24

Three things banks can do if a customer withdrawals more than the amount of excess reserves

Answer 24

1. Borrow from the FED
2. Borrow from another bank
3. Sell treasury bonds*

*not as common/important