Unit 8

Question 1

What is money

Answer 1

any asset that can easily be used to purchase goods and services

Question 2

What is currency in circulation

Answer 2

cash held by the public

Question 3

What is checkable bank deposits

Answer 3

bank accounts on which people can write checks

Question 4

What is money supply

Answer 4

the total value of financial assets in the economy that are considered money

Question 5

What is fiat money

Answer 5

money whose value derives entirely from its official status as a means of payment

Question 6

What is commodity backed money

Answer 6

a medium of exchange with no intrinsic value whose ultimate value is guaranteed by a promise that it can be converted into valuable goods

Question 7

What is monetary aggregate

Answer 7

an overall measure of the money supply

Question 8

What is M1

Answer 8

This includes only money in its most liquid form

Question 9

What is M2

Answer 9

includes near-money, financial assets that can’t be directly used as a medium of exchange but can be readily converted into cash or checkable bank deposits

Question 10

What is the function of money

Answer 10

A median of exchange
A store of value
A unit of account

Question 11

What are banks

Answer 11

financial intermediaries that use liquid assets (bank deposits) to finance illiquid investment of borrowers

Question 12

What is a t-account

Answer 12

a tool for analysing a business’s financial position by showing the business’s assets and liabilities

Question 13

What are the properties of a t-account

Answer 13

along the top you have assets and liabilities
Under assets you have loans and reserves
under liabilities you have deposits

Question 14

What is a bank reserve

Answer 14

the currency that the bank holds in their vaults plus their deposits at the federal reserve

Question 15

What is the reserve ratio

Answer 15

The fraction of bank deposits that a bank holds as reserves

Question 16

What is excess reserves

Answer 16

This is when a banks reserve is over the required reserve amount
we assume that banks don’t want to hold excess reserve so will loan out the excess

Question 17

How do banks create money

Answer 17

You deposit a sum of money at the bank
They are required to keep a portion of it in reserves
They then loan out the remainder and make money on interest and fees

Question 18

How does the FED increase money supply

Answer 18

The Fed injects reserves into the system

Question 19

How does the FED decease money supply

Answer 19

The FED must remove reserves from the system

Question 20

What is the discount rate

Answer 20

The rate of interest that the FED charges to loan to banks

Question 21

When the FED buys t-bills what happens

Answer 21

The FED has to pay for the t-bills
The fed elecronically increases reserves of the seller
with more reserves the bank lends out more loans
money supply increases as there is money creation

Question 22

What happens when the FED sells t-bills

Answer 22

the FED sells t-bills, this reduces the reserves of the buyer
with fewer reserves the bank lends out less loans
Money supply decreases as there is reduced money creation

Question 23

What is the federal funds market

Answer 23

This allows banks that fall short of the reserve requirement to borrow funds from banks with excess
reserves.

Question 24

What happens when the FED buys anything

Answer 24

The reserve increases

Question 25

What does the FED normally pick to buy and sell

Answer 25

The Fed normally picks to buy and sell short term bonds called treasury bills or t-bills