Money, Banking, Monetary Policy

Question 1

what are the 3 essential features of money?

Answer 1

medium of exchange, store of value, unit of account

Question 2

what is unit of account?

Answer 2

money creates common language for measurement, can compare values of items

Question 3

what is fiat money?

Answer 3

Money declared by the govt as medium of exchange - no intrinsic value
- non-consumable
- non perishable

Question 4

During a recession due to political instability, people are more likely to accept fiat/commodity money?

Answer 4

Commodity, as they lose faith in govt decreed money

Question 5

what is the function money plays as a store of value?

Answer 5

a means of holding wealth, recently declined due to stocks, crypto, etc

Question 6

are checkable deposits M1/M2?

Answer 6

M1

Question 7

are savings accounts M1/M2?

Answer 7

M2

Question 8

are traveler’s checks M1 or M2?

Answer 8

M1

Question 9

are mutual funds M1/M2?

Answer 9

M2

Question 10

are money market funds M1/M2?

Answer 10

M2

Question 11

rr formula

Answer 11

reserves/deposits

Question 12

how much money is created in the first round after $x deposit?

Answer 12

$x x (1 - rr)

Question 13

What is the money multiplier?

Answer 13

the rate at which banks multiply money.
mm = 1/rr

Question 14

What is the potential amount of money that can be created from $x deposit?

Answer 14

(money multiplier) mm x $x

Question 15

Who does deposit insurance?

Answer 15

FDIC - guarantees depositors don’t lose money if banks go bankrupt

Question 16

why could money created by bank be less than potential?

Answer 16

if people hold cash or banks hold excess reserves

Question 17

what are the 3 roles of the Fed?

Answer 17

Central banking - lender of last resort, monetary policy - bank for banks, bank regulation

Question 18

what are discount loans?

Answer 18

loans from the Fed to PRIVATE banks

Question 19

what are federal funds?

Answer 19

private bank deposits at Fed

Question 20

what is the Federal Funds rate?

Answer 20

the rate of interest on loans between 2 banks

Question 21

who sets the federal funds rate?

Answer 21

negotiated between 2 banks

Question 22

who regulates the federal funds rate? how?

Answer 22

the Fed, through monetary policy

Question 23

who sets the reserve ratio?

Answer 23

the FED

Question 24

to increase interest rate, Fed buys/sells securities?

Answer 24

SELLS (to banks) - receives money from banks in exchange - banks have less reserves - less money supply in economy, higher interest rates

Question 25

to increase bank reserves, Fed buys/sells securities?

Answer 25

BUYS - pays money to banks for it - more money supply - excess reserves for banks

Question 26

what are open market operations?

Answer 26

when Fed buys/sells securities to change interest rates

Question 27

which is more effective - changing discount rates or open market operations?

Answer 27

open market operations - closely linked to bank borrowing

Question 28

When inflation is high, expansionary/contractionary monetary policy is used?

Answer 28

Contractionary

Question 29

When unemployment is high, expansionary/contractionary monetary policy is used?

Answer 29

Expansionary

Question 30

For expansionary monetary policy, FOMC increases/decreases FFR?

Answer 30

Decreases (AD too low - encourage spending)

Question 31

For contractionary monetary policy, FOMC increases/decreases FFR?

Answer 31

Increases (AD too high - decrease spending)

Question 32

to increase FFR, FED increases/decreases IORB?

Answer 32

Increases - other banks increase FFR through arbitrage

Question 33

To decrease FFR, FED increases/decreases IORB?

Answer 33

Decreases - other banks lower FFR through arbitrage

Question 34

What is the FED’s dual mandate?

Answer 34

max employment, price stability (low inflation)

Question 35

what is a bank run?

Answer 35

when all depositors try to withdraw cash out of accounts

Question 36

what is systemic risk?

Answer 36

risks to the entire financial system because of banks that are too interconnected
(eg bank runs are contagious)

Question 37

to depositors, bank deposits are assets/liabilities?

Answer 37

assets (must be paid to depositor)

Question 38

to banks, bank deposits are assets/liabilities?

Answer 38

liabilities - OWED back to depositors (must be paid out)

Question 39

to banks, loans are assets or liabilities?

Answer 39

assets - money OWNED by the banks, loaned out (must be paid to bank)

Question 40

what are assets?

Answer 40

anything OWNED - must be received/paid back

Question 41

what are liabilities?

Answer 41

anything OWED - must be paid out

Question 42

what is net worth?

Answer 42

assets - liabilities

Question 43

during recessions, banks tend to hold more/less excess reserves?

Answer 43

more - scared to lend out, reduces multiplier

Question 44

expansionary monetary policy is used to lower/increase interest rates?

Answer 44

lower - expansionary - increase money supply - lower interest rates

Question 45

higher interest rates reduce/increase investment in housing?

Answer 45

reduce - more expensive to take out housing loan

Question 46

what is the chain of events of expansionary monetary policy?

Answer 46

recession -> Fed buys T bills -> banks have more reserves -> interest rates lower -> more investment I -> multiplier effect on spending -> AD increases

Question 47

what are the 3 mechanisms of monetary policy used by the Fed?

Answer 47

• open market operations
• discount rates
• reserve requirements

Question 48

when Fed buys bills/bonds, what happens to prices and interest rates?

Answer 48

prices rise, interest rates fall

Question 49

when Fed buys $1 of bonds/securities, supply of money/checkable deposits increases by?

Answer 49

mm x $1