Mankiw Ch 29 The Monetary System

Front 1

An institution designed to oversee the banking system and regulate the quantity of money in the economy:

Back 1

central bank

Front 2

The ease with which an asset can be converted into the economy’s medium of exchange w/ minimal loss of principal:

Back 2

liquidity

Front 3

Money that takes the form of a commodity with intrinsic value:

Back 3

commodity money

EX: Gold, silver, cigarettes

Front 4

An item that buyers give to sellers when they want to purchase goods and services:

Back 4

medium of exchange

Front 5

The quantity of money available in the economy:

Back 5

money supply

Front 6

Balances in bank accounts that depositors can access on demand by writing a check:

Back 6

demand deposits

Front 7

The interest rate on the loans that the Fed makes to banks:

Back 7

discount rate

Front 8

A banking system in which banks hold only a fraction of deposits as reserves:

Back 8

fractional-reserve banking

Front 9

The paper bills and coins in the hands of the public:

Back 9

currency

Front 10

The amount of money the banking system generates with each dollar of reserves:

Back 10

money multiplier

Front 11

The purchase and sale of U.S. government bonds by the Fed:

Back 11

open-market operations

Front 12

Money without intrinsic value that is used as money because of government decree:

Back 12

fiat money

EX: coins, currency, check deposits

Front 13

The setting of the money supply by policymakers in the central bank:

Back 13

monetary policy

Front 14

The central bank of the United States:

Back 14

Federal Reserve (Fed)

Front 15

The set of assets in an economy that people regularly use to buy goods and services from other people:

Back 15

money

Front 16

The fraction of deposits that banks hold as reserves:

Back 16

reserve ratio

Front 17

The yardstick people use to post prices and record debts:

Back 17

unit of account

Front 18

Deposits that banks have received but have not loaned out:

Back 18

reserves

Front 19

An item that people can use to transfer purchasing power from the present to the future:

Back 19

store of value

Front 20

Regulations on the minimum amount of reserves that banks must hold against deposits:

Back 20

reserve requirements

Front 21

Money serves what 3 functions in the economy?

Back 21

1) store of value
2) unit of account
3) medium of exchange

Front 22

What kind of money does not have intrinsic value?

Back 22

Fiat money

Front 23

What is the Fed designed to oversee?

Back 23

The banking system

Front 24

Give 3 ways that the Fed can decrease the money supply:

Back 24

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.

Front 25

What implements some of the Fed's most important policy decisions?

Back 25

The New York Fed

Front 26

The fraction of total deposits that a bank has to keep as reserves:

Back 26

Reserve ratio

Front 27

What results from decreasing the reserve requirement?

Back 27

An increase in the money supply.

Front 28

Anything that is readily acceptable as payment:

Back 28

A medium of exchange

Front 29

Why is fiat money used as money?

Back 29

Because of government decree

Front 30

Why was the Fed created?

Back 30

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.

Front 31

What results from increasing the reserve requirement?

Back 31

A decrease in the money supply.

Front 32

Give 3 ways that the Fed increase the money supply:

Back 32

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.

Front 33

What is the reciprocal of the reserve ratio?

Back 33

Money multiplier

M = 1/R

Front 34

What do the 12 regional Federal Reserve banks regulate?

Back 34

They regulate banks in their districts.

Front 35

The multiplier effect occurs because:

Back 35

An increase in government purchases will increase income which will result in further rounds of spending.

Front 36

Suppose the Federal Reserve decreases the money supply. As a result:

Back 36

Investment, real output, and the price level are also lower.

Front 37

The main reason for holding money is:

Back 37

It can be used to buy things.

Front 38

Suppose people decide to hold more currency. To do so, they withdraw money from their demand deposits. Other things being equal, this will ultimately:

Back 38

reduce bank reserves

Front 39

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:

Back 39

A unit of account

Front 40

What is the discount rate?

Back 40

The interest rate charged by the Fed on funds loaned to banks.

Front 41

What are tools of the Fed?

Back 41

1) open market operations
2) discount rate policy
3) changes in reserve requirements

Front 42

Jennifer deposits $1,000 into her bank. The reserve requirement is 15%. If the bank holds no excess reserves:

Back 42

Its loans will increase by $850, and its requried reserves will increase by $150.

Front 43

Suppose the Federal Reserve sells $1,000,000 of U.S. government bonds. We would expect:

Back 43

A decrease in the money supply.

Front 44

M-1 is composed of:

Back 44

Currency (held by the public), demand deposits, travelers checks, and other checkable deposits.

Front 45

If the Fed wishes to reduce the money supply it would most likely:

Back 45

Sell securities through its open market operations.

Front 46

What is the primary purpose of the lengthy terms of the members of the Board of Governors?

Back 46

To insulate them from short-term political pressures when they formulate monetary policy.

Front 47

What is fractional reserve banking?

Back 47

A system in which banks maintain only a fraction of deposits as reserves.

Front 48

What is the most important function of the Federal Reserve?

Back 48

Conducting the nation's monetary policy.

Front 49

Balances in bank accounts that depositors can access by writing a check are known as:

Back 49

demand deposits

Front 50

The primary function of the Federal Open Market Committee is to:

Back 50

Direct the buying and selling of U.S. government bonds, which is the primary instrument of monetary policy.

Front 51

What is an asset for a bank?

Back 51

loans

Front 52

Suppose that a local bank has made a $100,000 loan. How much money has this bank initially created?

Back 52

$100,000

Front 53

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:

Back 53

$120 million in required reserves.

Front 54

Sara saves 10% of each payceck so she can tour Europe two years from now. In this example, money is functioning as:

Back 54

A store of value.

Front 55

Assume Bank A receives a deposit of $4,000. If the required reserve ratio is 15%, how much can Bank A loan out?

Back 55

$ 3,400

Front 56

Suppose the Fed decreases the reserve requirement from 10% to 9%. What will occur?

Back 56

Bank excess reserves will increase.

Front 57

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

Back 57

d. a twenty-dollar bill

Front 58

The Federal Open Market Committee (FOMC) consists of:

Back 58

5 of the presidents of the Federal Reserve Banks and the 7 members of the Board of Governors.

Front 59

Giving up a dollar bill to purchase an ice cream cone illustrates money's function as:

Back 59

A medium of exchange

Front 60

What would increase the value of the money multiplier?

Back 60

A decrease in the reserve ratio.

Front 61

In all, how many Federal Reserve District Banks are there?

Back 61

12

Front 62

For something to be a medium of exchange, it must be:

Back 62

Generally accepted by people for goods and services.

Front 63

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:

Back 63

$1,000,000

Front 64

Suppose you find $50,000 cash in your closet and deposit it into your checking account in a commercial bank. What will occur?

Back 64

M-1 will remain constant

Front 65

Who conducts the Federal Reserve's open market operations?

Back 65

The Federal Open Market Committe (FOMC)

Front 66

What happens when there are no excess reserves in the banking system?

Back 66

Banks cannot expand the money supply.

Front 67

Which group runs the Fed?

Back 67

The Board of Governors

Front 68

What item would be a liability to a bank?

Back 68

deposits

Front 69

In a barter economy, exchange depends on:

Back 69

Double coincidence of wants

Front 70

The ability of banks to create money has its source in:

Back 70

Fractional reserve banking

Front 71

The purchase of pizza at the local student union building is using money as:

Back 71

A medium of exchange

Front 72

The ease by which one may convert an asset into an economy's medium of exchange:

Back 72

Liquidity

Front 73

What does money eliminate?

Back 73

The need to have a double coincidence of wants to conduct an exchange.

Front 74

What happens to the money supply when a bank makes a loan from its reserves?

Back 74

The money supply increases.

Front 75

What are the 2 problems that the Fed faces due to fractional-reserve banking?

Back 75

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.

Front 76

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?

Back 76

M1 would not change.

Front 77

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?

Back 77

20%

Front 78

If the reserve ratio is 2.5%, the money multiplier is:

Back 78

40

Front 79

Suppose that the reserve ratio is 10% and that a bank has $2,000 in deposits. What are its required reserves?

Back 79

$200

Front 80

If the reserve ratio increased from 10% to 20%, the money multiplier would:

Back 80

Fall from 10 to 5.

Front 81

Suppose a bank has $200,000 in deposits and $190,000 in loans. What is its reserve ratio?

Back 81

200,000 - 190,000 = 10,000

200,000 / 10,000 = 20%

Front 82

What happens to the reserve ratio if reserve requirements are increased?

Back 82

1)The reserve ratio increases.
2)The money multiplier decreases.
3)The money supply decreases.

Front 83

Today, bank runs are:

Back 83

Uncommon b/c of FDIC deposit insurance.

Front 84

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?

Back 84

$30 million

Front 85

What function does money serve when it used to measure the prices of different goods and services?

Back 85

Standard of value

Front 86

How long is the term for the Board of Governors?

Back 86

14 years

Front 87

If the economy is stuck in a recession, an appropriate policy for the Federal Reserve might be to:

Back 87

Buy bonds

Front 88

M1 includes:

Back 88

1.Currency
2.Demand Deposits
3.Other Checkable Deposits
4.Traveler's Checks

Front 89

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:

Back 89

$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.

Front 90

M2 includes:

Back 90

1.M1
2.Savings Deposits
3.Small Time Deposits
4.Money Market Deposit Accounts

Front 91

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:

Back 91

$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