Unit 4

Question 1

Financial Sector

Answer 1

Institutions that link borrowers and lenders

Question 2

Assets

Answer 2

Tangible or intangible things that hold value

Question 3

Interest Rate

Answer 3

Amount a lender charges a borrower for borrowing money

Question 4

Interest-Bearing Assets

Answer 4

Assets that earn interest over time

Question 5

Liquidity

Answer 5

The ease at which an asset can be used as a medium of exchange (higher liquidity = lower return rate)

Question 6

Bonds

Answer 6

Government IOU (you don’t own anything)

Question 7

Stocks

Answer 7

Ownership of a corporation (portion of profit called dividends)

Question 8

Barter System

Answer 8

Goods and services are traded directly, no money is exchanged

Question 9

3 Functions of Money

Answer 9

Medium of exchange; Unit of account; Store of value

Question 10

Why does money work?

Answer 10

Money is generally accepted; Money is scarce; Money is portable and dividable

Question 11

M1 (highest liquidity)

Answer 11

Currency in circulation or bank deposits or savings deposits

Question 12

M2 (M1 + some other stuff)

Answer 12

Time deposits or money market funds

Question 13

Why are people demanding money?

Answer 13

Transaction demand (money used for everyday purchases); Asset demand (holding money is sometimes less risky than other assets)

Question 14

Reserve Requirement

Answer 14

Percent of deposits that the banks must hold in reserves (they cannot loan these out)

Question 15

Discount Rate

Answer 15

Interest rate that the Fed charges commercial banks

Question 16

Open Market Operations

Answer 16

When the Fed buys or sells government bonds to control the economy

Question 17

Federal Funds Rate

Answer 17

Interest rates that banks charge one another for one-day loans of reserves

Question 18

Demand Deposits

Answer 18

Money deposited into a commercial bank in a checking account

Question 19

Required Reserves

Answer 19

% banks must hold by law

Question 20

Excess Reserves

Answer 20

Amount banks can loan out

Question 21

Loanable Funds Market

Answer 21

Shows the supply and demand of loans and the equilibrium real interest rates

Question 22

Private Savings

Answer 22

Amount households save

Question 23

Public Savings

Answer 23

Amount government saves

Question 24

Shifter of Demand in Loanable Funds Market

Answer 24

Change in borrowing by consumers; Change in borrowing by business; Change in borrowing by the government

Question 25

Shifter of Supply in Loanable Funds Market

Answer 25

Change in private savings behavior; Change in public savings behavior; Change in foreign investment

Question 26

Monetary Policy

Answer 26

When the Fed makes changes to the money supply to influence the interest rates

Question 27

Interest on Reserves

Answer 27

Interest rates that the Fed pays commercial banks to hold the banks' reserves

Question 28

Administered Rates

Answer 28

Interest rates set by the Fed (discount rate and interest on reserves)