Money

Question 1

Three functions of money

Answer 1

Medium of exchange, unit of account (the yardstick people use to post prices and record debts), and store of value (an item that people can use to transfer purchasing power from present to the future)

Question 2

Commodity money

Answer 2

Money that takes the form of a commodity with intrinsic value. Example: gold

Question 3

fiat money

Answer 3

Money without intrinsic value that is used as money because of government decree.

Question 4

When was the Fed created?

Answer 4

1913 after a series of bank failures in 1907

Question 5

Who is the fed ran by?

Answer 5

Board of governors, 7 members with 14-year terms appointed by president and confirmed by senate.

Question 6

Fed governor terms and why?

Answer 6

14 year terms to give them independence from short-term political pressures when they formulate monetary policy

Question 7

The current and two past chairmen of the Fed

Answer 7

Bernanke in past and current Janet Yallen

Question 8

3primary jobs of the fed

Answer 8

1. Regulate banks and Ensure the health of the banking system.
2. Bank’s bank–when financially troubled banks find themselves short of cash, the Fed is a lender of last resort–to maintain stability in the overall banking system
3. Control the money supply (the quantity of money made available in the economy. This makes up monetary policy.

Question 9

Who makes monetary policy and what is the structure?

Answer 9

Federal Open Market Committee, which meets every 6 weeks in DC to discuss condition of economy. Made of 7 members of board of governors and 5 of 12 regional bank presidents (one always being the NY president)

Question 10

What is the primary tool in changing the money supply?

Answer 10

Open market operation–the purchase and sale of US government Bonds

Question 11

Fractional-reserve banking

Answer 11

banks only hold a fraction of deposits on reserve e

Question 12

Reserve Ratio

Answer 12

fraction of deposits that the banks hold

Question 13

What is the significance of reserve ratio?

Answer 13

When banks hold only a fraction of deposits in reserve, banks create money. Because a deposit counts for one person and the acceptance of a loan for another person is counted as money too.

Question 14

What is the money multiplier

Answer 14

Amount of money the banking system generates with each dollar of reserves. It’s the reciprocal of the reserve ratio

Question 15

bank capital

Answer 15

the resources a bank’s owners have put into the institution

Question 16

Leverage

Answer 16

the use of borrowed money to supplement existing funds for purpose of investment

Question 17

Each new dollar held as currency increases the money supply by _____. Each new dollar deposited in a bank increases the money supply by ______________ . Why?

Answer 17

Because in the second example it increases reserves, and therefore, the amount of money that the banking system can create

Question 18

Open market operations

Answer 18

the purchase and sale of US government bonds by the fed. The fed buys bonds and infuses money into the economy by purchasing it with money that it printed itself

Question 19

Fed lending to banks

Answer 19

Increase the quantity of reserves in the economy by lending reserves to banks. Banks borrow from the Fed when they don’t have enough reserves on hand to satisfy bank regulators, meet depositor withdrawals, make new loans, or another reason.

Question 20

How banks borrow from the fed. How does the fed alter the money supply here?

Answer 20

Banks borrow from the Fed’s discount window and pay interest rate on that loan called the discount rate. The fed alters money supply by changing the discount rate. A higher rate discourages banks from borrowing reserves from the Fed, reducing the quantity of reserves, reducing the money supply.

Question 21

How the fed influences the reserve ratio

Answer 21

1. Regulating the quantity of reserves banks must hold. If they require greater reserve amounts, there is less money that can be made because banks must hold on to it.
2. Interest rate the Fed pays on their reserves. The higher the interest rate on reserves, the more reserves banks will choose to hold. Thus an increase on reserves will tend to increase the reserve ratio, lower the money multiplier, and lower the money supply.

Question 22

Federal Funds rate

Answer 22

Short-term interest rate that banks charge one another for loans. If one bank is short of reserves while another has excess, the second bank lends reserves to the first.