Test 3 ch 10 (money and banking)

Question 1

Barter

Answer 1

The direct exchange of goods and services; requires a double coincidence of wants (I have to want what you are trading and vice versa)

Question 2

Money

Answer 2

An asset that is generally accepted as a means of payment for goods and services.

Question 3

Commodity money

Answer 3

It is an item that serves a useful purpose other than acting as a medium of exchange. (ex. salt, gold, and other precious metals that have been used in the past.

Question 4

Fiat money

Answer 4

Is paper currency and coin that has been designated by government as legal tender (it must be accepted as payment for debts) - no real value.

Question 5

The functions of money

Answer 5

1) Medium of exchange
2) Unit of account (standard of value)
3) Store of value (store of wealth)

Question 6

Liquidity

Answer 6

This refers to the ease with which the asset may be converted into a medium of exchange without loss of value.

Question 7

M1 measures of the money supply

Answer 7

M1, includes liquid assets, such as cash and checking account deposits, that are directly and immediately spendable.
M1= currency held by the public + demand and other checkable deposits + traveler’s checks

Question 8

M2measures fo the money supply

Answer 8

M2 is a broader measure of the money supply which includes both liquid (dependable) assets that are contained in the M1 plus less liquid assets or near-monies. money market deposit accounts are included in saving deposits.
M2= M1 + saving deposits + small denomination time deposits + retail money funds.

Question 9

Fractional reserve banking

Answer 9

in fractional reserve banking systems banks (depository institutions) are required to hold only a small fraction of their total deposits on reserve. legally can be in the form of cash in vaults or as deposits at a federal reserve bank.

Question 10

Required reserve ratio (r)

Answer 10

The fraction of deposits that must be held as reserves. typically r is around 10%.

Question 11

Actual or total bank reserves (R)

Answer 11

consists of cash in the bank’s vault and deposits at the federal reserve bank.

Question 12

Excess reserves (ER)

Answer 12

Reserves held beyond the minimum required are called excess reserves. (profit-maximizing banks may have an incentive to keep excess reserves close to zero because banks may earn more by putting funds into other interest-bearing assets such as loans and securities).

Question 13

Simple deposit multiplier

Answer 13

The maximum amount of new deposit dollars that can be created through lending can be estimated using the simple deposit multiplier. (Simple deposit multiplier = 1/r). [to find the maximum amount of total deposits that can be supported by $__ = simple deposit multiplier x $__]

Question 14

Maximum deposit creation calculations

Answer 14

[to find the maximum amount of total deposits that can be supported by $__ = simple deposit multiplier x $__]

Question 15

Maximum potential change in the money supply calculations

Answer 15

The potential/additional deposit creation (maximum increase in the money supply) = change in excess reserve times the simple deposit multiplier = chg ER x (1/r)

Question 16

Medium of exchange

Answer 16

Is something that is generally accepted in trade for goods and services and settlement of debts.
(Money as a medium of exchange is better than barter because barter requires a double coincidence of wants and leads to inefficiency).

Question 17

Unit of account (standard of value)

Answer 17

Money acts as a common denominator for comparing the relative values of goods and services.
(money serves this function and increases efficiency because using money values to make decisions, communicate, and keep records reduces transaction costs). ex. “how many loaves of bread is a blanket worth?”

Question 18

Store of value (store of wealth)

Answer 18

Money serves as a store of value because it stores purchasing power over time and can be used for future purchases. (people don’t always want to spend all of their income as soon as it is received).

Question 19

Required reserves (RR)

Answer 19

is the fraction of deposits that must be held as reserves.

Question 20

Money multiplier process

Answer 20

As the banks retain only a small fraction of these reserves, the rest (excess reserves) may be loaned out. In the money multiplier process money created by one bank is deposited into another bank, allowing loans to be created.