What Money Is, Money and Banking, Money Market

Question 1

the three purposes of money

Answer 1

1. store of value - to transfer purchasing power from the present to the future
2. unit of account - the terms in which prices are quoted and debts are recorded
3. medium of exchange - what we use to buy goods and services

Question 2

denotes the amount of currency in circulation i.e., currency bills, coins, and bank reserves

Answer 2

M0 or monetary base

Question 3

includes M0 and other liquid deposits in bank,
e.g., demand deposits, checking account deposits, and traveler’s check

Answer 3

M1 or narrow money

Question 4

adds to M1 other assets that are not quite as
liquid as those included in M1, such as assets that have check-writing
features and other assets that can be turned into cash quickly and at very little cost

Answer 4

M2 or broad money

Question 5

include M2 plus money substitutes
such as promissory notes and commercial papers

Answer 5

M3 or broad money liabilities

Question 6

M3 plus transferable deposits, treasury bills
and deposits held in foreign currency deposits; almost all short-term,
highly liquid assets will be included in this measure

Answer 6

M4 or liquidity money

Question 7

the price paid for borrowing money is ___

Answer 7

the interest rate

Question 8

a certificate of indebtedness that specifies the obligations
of the borrower to the buyer

Answer 8

bond

Question 9

the time at which the loan will be repaid

Answer 9

the date of maturity

Question 10

the amount borrowed in a bond

Answer 10

principal

Question 11

The price of a bond and the interest rate it pays are ____ related

Answer 11

negatively/inversely

Question 12

how do banks obtain funds? why?

Answer 12

by borrowing and issuing other liabilities such as deposits; to acquire assets such as loans and bonds

Question 13

a statement of a firm’s
financial position at a point in time; it lists assets (items that the
bank owns) and liabilities (items that the bank owes)

Answer 13

bank balance sheet

Question 14

a special asset that consists of currency held by the bank and the bank’s deposits with the central bank

Answer 14

reserves

Question 15

why do banks have an incentive to make loans to individuals and firms?

Answer 15

because they can charge interest on these loans

Question 16

a bank need not keep all its deposits in reserve when

Answer 16

amount of new deposits = amount of withdrawals

Question 17

This is the practice whereby a bank
accepts deposits and holds reserves that are a fraction of the amount
of its deposit liabilities.

Answer 17

fractional-reserve banking

Question 18

Bank money = total reserves x 1/reserve ratio (money multiplier)

what is reserve ratio?

Answer 18

the fraction of total deposits banks keep as reserves

Question 19

what is the primary difference between banks and other financial institutions?

Answer 19

the banking system’s ability to create money

Question 20

the process of transferring funds from savers to borrowers is called ___

Answer 20

financial intermediation

Question 21

why are banks the only financial institutions that directly influence the money supply?

Answer 21

because only banks have the legal authority to create assets that are part of the money supply

Question 22

Money supply in the real world is determined by ____, ____, and _____.

Answer 22

the Bangko Sentral ng Pilipinas (BSP); the banking system; consumers

Question 23

expansionary monetary policy

Answer 23

if the money supply is increased by the central bank

Question 24

contractionary monetary policy

Answer 24

if the money supply is decreased by the central bank

Question 25

the three instruments of monetary policy

Answer 25

Open market operations (OMO), Discount-window lending, Reserve-requirements policy

Question 26

the central bank’s primary tool for implementing monetary policy; activities whereby the central bank affects bank
reserves by buying or selling government securities (bonds) on the
open market.

Answer 26

Open Market Operations

Question 27

a facility from which banks can borrow
when they need additional funds

Answer 27

discount window

Question 28

the central bank charges a ____ on borrowed funds

Answer 28

discount rate

Question 29

the fraction of deposits that banks hold in reserve; determined by the business policies of banks and the laws regulating banks

Answer 29

reserve-deposit ratio (re)

Question 30

the amount of currency CU people
hold as a fraction of their holdings of demand deposits DD; reflects the preferences of households about the form of money they wish to hold

Answer 30

currency-deposit ratio (cu)

Question 31

two features of money that are particularly important

Answer 31

1. money is the most liquid asset
2. money pays a low return

Question 32

What is the cost of holding money?

Answer 32

The cost of holding money is the interest forgone from not holding other assets.

Question 33

three variables that affect money demand

Answer 33

price level, real income, nominal interest rate