Role of Money & Banking (Ch 11)

Question 1

3 key entities of the FED

Answer 1

Board of Governors, 12 Bank Districts, Federal Open Market Committee

Question 2

5 key FED functions

Answer 2

conduct monetary policy, help stabilize financial system, regulate financial institutions, foster payment/settlement system, promote consumer protection

Question 3

liquidity

Answer 3

ease w/ which any asset can be turned into cash (eg raw land is difficult, savings account is easy)

Question 4

nominal interest rate

Answer 4

interest rate before taking inflation into account (real int rate + expected rate of inflation)

Question 5

inflation

Answer 5

general rise in overall prices

Question 6

price index

Answer 6

measurement tool to place price value on groups of g/s

Question 7

how FED changes discount rate w/in monetary policy

Answer 7

lowering discount rate = cheaper for banks to borrow = more lending = expansionary monetary policy/raising discount rate = more expensive for banks to borrow = they lend less = contractionary

Question 8

aggregate demand

Answer 8

total demand for g/s in a market

Question 9

interest rates in expansionary vs contractionary monetary policy

Answer 9

expansionary: int rates drop; contractionary: int rates increase

Question 10

risk’s affect on interest rates

Answer 10

higher if borrower is risky (character, credit score, length of holding job), if inflation = higher, time of loan is longer, or down payment is less

Question 11

demand-pull inflation

Answer 11

overall demand for g/s grows faster than economy can crank out those g/s; more $ chases fewer goods, so prices go up

Question 12

cost-push inflation

Answer 12

price of g/s rises due to higher production costs; those g/s sell for higher prices as supply curve shifts to the left

Question 13

price-wage spiral

Answer 13

positive feedback loop of inflation; prices rise, workers demand higher pay, leads to higher prices, leads to demanding more pay… (lack of competition exacerbates this bc a business can more easily raise the price in its market if it doesn’t need to stay competitive)

Question 14

who inflation harms

Answer 14

lenders, savers, exporters (bc the real value of their assets decreases)

Question 15

who inflation helps

Answer 15

borrowers (pay back in dollars w/ less purchasing power), state gov’ts w/ tax brackets (ppl get pushed to higher tax brackets)

Question 16

what the money supply consists of

Answer 16

currency, coins, and checking account deposits

Question 17

“demand deposits”

Answer 17

checking accounts

Question 18

borrowing

Answer 18

spending future money today (do it when expected return is greater than interest over time)

Question 19

defaulting

Answer 19

failing to repay