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91 Cards in this Set

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An institution designed to oversee the banking system and regulate the quantity of money in the economy:
central bank
The ease with which an asset can be converted into the economy’s medium of exchange w/ minimal loss of principal:
liquidity
Money that takes the form of a commodity with intrinsic value:
commodity money

EX: Gold, silver, cigarettes
An item that buyers give to sellers when they want to purchase goods and services:
medium of exchange
The quantity of money available in the economy:
money supply
Balances in bank accounts that depositors can access on demand by writing a check:
demand deposits
The interest rate on the loans that the Fed makes to banks:
discount rate
A banking system in which banks hold only a fraction of deposits as reserves:
fractional-reserve banking
The paper bills and coins in the hands of the public:
currency
The amount of money the banking system generates with each dollar of reserves:
money multiplier
The purchase and sale of U.S. government bonds by the Fed:
open-market operations
Money without intrinsic value that is used as money because of government decree:
fiat money

EX: coins, currency, check deposits
The setting of the money supply by policymakers in the central bank:
monetary policy
The central bank of the United States:
Federal Reserve (Fed)
The set of assets in an economy that people regularly use to buy goods and services from other people:
money
The fraction of deposits that banks hold as reserves:
reserve ratio
The yardstick people use to post prices and record debts:
unit of account
Deposits that banks have received but have not loaned out:
reserves
An item that people can use to transfer purchasing power from the present to the future:
store of value
Regulations on the minimum amount of reserves that banks must hold against deposits:
reserve requirements
Money serves what 3 functions in the economy?
1) store of value
2) unit of account
3) medium of exchange
What kind of money does not have intrinsic value?
Fiat money
What is the Fed designed to oversee?
The banking system
Give 3 ways that the Fed can decrease the money supply:
1) OPEN-MARKET OPERATIONS Sell government bonds to the public.
2) CHANGING THE RESERVE REQUIREMENT
Increase the reserve requirement.
3) CHANGING THE DISCOUNT RATE
Increase the discount rate.
What implements some of the Fed's most important policy decisions?
The New York Fed
The fraction of total deposits that a bank has to keep as reserves:
Reserve ratio
What results from decreasing the reserve requirement?
An increase in the money supply.
Anything that is readily acceptable as payment:
A medium of exchange
Why is fiat money used as money?
Because of government decree
Why was the Fed created?
1913 - a series of bank failures convinced Congress that the U.S. needed a CENTRAL BANK to ensure the health of the nation's banking system.
What results from increasing the reserve requirement?
A decrease in the money supply.
Give 3 ways that the Fed increase the money supply:
1) OPEN-MARKET OPERATIONS Buy government bonds from the public.
2) CHANGING THE RESERVE REQUIREMENT
Decrease the reserve requirement.
3) CHANGING THE DISCOUNT RATE
Decrease the discount rate.
What is the reciprocal of the reserve ratio?
Money multiplier

M = 1/R
What do the 12 regional Federal Reserve banks regulate?
They regulate banks in their districts.
The multiplier effect occurs because:
An increase in government purchases will increase income which will result in further rounds of spending.
Suppose the Federal Reserve decreases the money supply. As a result:
Investment, real output, and the price level are also lower.
The main reason for holding money is:
It can be used to buy things.
Suppose people decide to hold more currency. To do so, they withdraw money from their demand deposits. Other things being equal, this will ultimately:
reduce bank reserves
Laura is thinking of purchasing a new car. She compares the price of Toyota Camry and the price of Nissan Maxima. In this instance, money is functioning as:
A unit of account
What is the discount rate?
The interest rate charged by the Fed on funds loaned to banks.
What are tools of the Fed?
1) open market operations
2) discount rate policy
3) changes in reserve requirements
Jennifer deposits $1,000 into her bank. The reserve requirement is 15%. If the bank holds no excess reserves:
Its loans will increase by $850, and its requried reserves will increase by $150.
Suppose the Federal Reserve sells $1,000,000 of U.S. government bonds. We would expect:
A decrease in the money supply.
M-1 is composed of:
Currency (held by the public), demand deposits, travelers checks, and other checkable deposits.
If the Fed wishes to reduce the money supply it would most likely:
Sell securities through its open market operations.
What is the primary purpose of the lengthy terms of the members of the Board of Governors?
To insulate them from short-term political pressures when they formulate monetary policy.
What is fractional reserve banking?
A system in which banks maintain only a fraction of deposits as reserves.
What is the most important function of the Federal Reserve?
Conducting the nation's monetary policy.
Balances in bank accounts that depositors can access by writing a check are known as:
demand deposits
The primary function of the Federal Open Market Committee is to:
Direct the buying and selling of U.S. government bonds, which is the primary instrument of monetary policy.
What is an asset for a bank?
loans
Suppose that a local bank has made a $100,000 loan. How much money has this bank initially created?
$100,000
Suppose the Fed purchases $600 million of U.S. government securities from securities dealers who deposit the entire proceeds of the sale into banks. If the reserve requirement is 20%, banks will now have:
$120 million in required reserves.
Sara saves 10% of each payceck so she can tour Europe two years from now. In this example, money is functioning as:
A store of value.
Assume Bank A receives a deposit of $4,000. If the required reserve ratio is 15%, how much can Bank A loan out?
$ 3,400
Suppose the Fed decreases the reserve requirement from 10% to 9%. What will occur?
Bank excess reserves will increase.
Which of the following financial assets is considered to be the most liquid?

a. land
b. General Motors stock
c. savings accounts in banks
d. a twenty-dollar bill
d. a twenty-dollar bill
The Federal Open Market Committee (FOMC) consists of:
5 of the presidents of the Federal Reserve Banks and the 7 members of the Board of Governors.
Giving up a dollar bill to purchase an ice cream cone illustrates money's function as:
A medium of exchange
What would increase the value of the money multiplier?
A decrease in the reserve ratio.
In all, how many Federal Reserve District Banks are there?
12
For something to be a medium of exchange, it must be:
Generally accepted by people for goods and services.
Suppose the reserve ratio is 10%. There are $100,000 of excess reserves in the banking system. The maximum amount by which the money supply can expand is:
$1,000,000
Suppose you find $50,000 cash in your closet and deposit it into your checking account in a commercial bank. What will occur?
M-1 will remain constant
Who conducts the Federal Reserve's open market operations?
The Federal Open Market Committe (FOMC)
What happens when there are no excess reserves in the banking system?
Banks cannot expand the money supply.
Which group runs the Fed?
The Board of Governors
What item would be a liability to a bank?
deposits
In a barter economy, exchange depends on:
Double coincidence of wants
The ability of banks to create money has its source in:
Fractional reserve banking
The purchase of pizza at the local student union building is using money as:
A medium of exchange
The ease by which one may convert an asset into an economy's medium of exchange:
Liquidity
What does money eliminate?
The need to have a double coincidence of wants to conduct an exchange.
What happens to the money supply when a bank makes a loan from its reserves?
The money supply increases.
What are the 2 problems that the Fed faces due to fractional-reserve banking?
1) The Fed does not control the amount of money that households choose to hold as deposits in banks.
2) The Fed does not control the amount that bankers choose to lend.
In a 100-perecent reserve banking system, what would happen if people decided to decrease the amount of currency they held by increasing the amount they held in checkable deposits?
M1 would not change.
Suppose a bank has $10,000 in deposits and $8,000 in loans. It has loaned out all it can. What would its reserve ratio be?
20%
If the reserve ratio is 2.5%, the money multiplier is:
40
Suppose that the reserve ratio is 10% and that a bank has $2,000 in deposits. What are its required reserves?
$200
If the reserve ratio increased from 10% to 20%, the money multiplier would:
Fall from 10 to 5.
Suppose a bank has $200,000 in deposits and $190,000 in loans. What is its reserve ratio?
200,000 - 190,000 = 10,000

200,000 / 10,000 = 20%
What happens to the reserve ratio if reserve requirements are increased?
1)The reserve ratio increases.
2)The money multiplier decreases.
3)The money supply decreases.
Today, bank runs are:
Uncommon b/c of FDIC deposit insurance.
At one time, the country of Spain had no banks, but had currency of $10 million. A banking system was established w/ a reserve requirement of 20%. The ppl of Spain deposited half of their currency into the banking system. If the banks do not hold excess reserves, what is Spain's money supply? now?
$30 million
What function does money serve when it used to measure the prices of different goods and services?
Standard of value
How long is the term for the Board of Governors?
14 years
If the economy is stuck in a recession, an appropriate policy for the Federal Reserve might be to:
Buy bonds
M1 includes:
1.Currency
2.Demand Deposits
3.Other Checkable Deposits
4.Traveler's Checks
Assume that a bank has demand deposits of $300,000, total reserves of $75,000 and a reserve requirement ratio of .15 (15%). This bank can safely lend:
$30,000
The bank’s required reserves are .15($300,000) = $45,000. The difference between total reserves and required reserves, $75,000 - $45,000 = $30,000, is its excess reserves, which is the total amount the bank can lend.
M2 includes:
1.M1
2.Savings Deposits
3.Small Time Deposits
4.Money Market Deposit Accounts
Assume that a bank has $80,000 in demand deposits, total reserves of $60,000, and a reserve requirement ratio of .20 (20%). This bank can safely lend:
$44,000
The bank’s required reserves are .2($80,000) = $16,000
Total reserves – Required reserves = Excess reserves
$60,000 - $16,000 = $44,000