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40 Cards in this Set
- Front
- Back
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*Which of the following is not a function of money? -Medium of exchange -Unit of Account -Open Market Operation -Store of Value |
Open Market Operation |
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*If something is to be considered as money, it has to fulfill... |
All four functions of money |
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*Which of the following is included in M2 but not in M1? -Money Market Deposit accounts in Banks -Checking Account Deposits at Banks -Traveler's Checks -Currency |
Money Marked Deposit Accounts in Banks |
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*Suppose you have $2000 in currency in a shoebox in your closet. One day, you decide to deposit the money in a checking account. How will this action affect the M! and M2 definitions of the money supply? |
Both M1 and M2 will remain unchanged |
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*The formula for the simple deposit multiplier is |
Simple Deposit Multiplier = 1/RR |
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*If the required reserve ratio is 0.2, the maximum increase in checking account deposits that will result from an increase in bank reserves of $20,000 is $_____. |
Simple Deposit Multiplier= 1/RR
so...
$20,000/0.20 = $100,000 |
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*Congress passed legislation to create the Federal Reserve System in 1913 in order to.... |
End the instability created by bank panics by acting as a lender of last resort |
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*The most important role of the Federal Reserve in today's U.S. economy is |
Controlling the money supply to pursue economic objectives |
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*Which of the following is not one if the policy tool the Fed uses to control the money supply? -Moral suasion -Discount policy -Reserve requirements -Open Market operations |
Moral Suasion |
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*Which tool is the most important?
-The Fed conducts monetary policy principally by tax cuts and government spending increases.
-The Fed conducts monetary policy principally by changing the reserve requirement.
-The Fed conducts monetary policy principally through open market operations.
-The Fed conducts monetary policy principally through discount policy. |
The Fed conducts monetary policy principally through open market operations. |
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The text explains that the United States has a "fractional reserve banking system." *Why do most depositors seem to be unworried that banks loan out most of the deposits they receive? |
The FDCI insures deposits up to $250,000. |
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Suppose that you are a bank manager, and the Federal Reserve raises the required reserve ratio from 10 percent to 12 percent. *What actions would you need to take? |
You would have to reduce loans to make up for the necessary increase in reserves. |
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Suppose that you are a bank manager, and the Federal Reserve raises the required reserve ratio from 10 percent to 12 percent. *As your actions and those of other bank managers reduced the amount of loans made, we would expect that the money supply would ind up (increasing, decreasing or staying the same). |
Decreasing |
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Assets that people are generally willing to accept in exchange for goods and services or for payment of debts |
Money |
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Anything of value owned by a person or a firm. |
Asset |
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The ease with which an asset can be converted into the medium of exchange |
Liquidity |
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What are the five criteria that make a good suitable for use as a medium of exchange? |
-Must be acceptable to most people -Standardized quality so that any two units are identical -Durable so that value is not lost by spoilage -Valuable relative to it's weight so that amounts large enough to be useful in trade can be easily transported -Should be divisible because different goods are valued differently |
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The narrowest definition of the money supply (Currency & Checkable Deposits) |
M1 |
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A broader definition of the money supply (M1 + Savings + Time Deposits+ MMMF) |
M2 |
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A good used as money that also has value independent of its use of money |
Commodity Money |
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Money such as paper currency that is authorized by a central bank or government body & that does not have to be exchanged by the central bank for gold or some other commodity money |
Fiat Money |
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How do banks create money? (2-ways) |
Bank Balance Sheets Simple Deposit Multiplier |
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Deposits a bank keeps as cash w/ Fed Reserve
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Reserves
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Reserves a bank is legally required to hold, based on deposits in checking
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Required Reserves
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Minimum fraction of deposit banks is legally req. to hold
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Required Reserve Ratio
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Reserves that banks hold over & above the legal requirement
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Excess Reserves
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Ratio of the amount of deposits created by banks to the amount of new reserves |
Simple Deposit Multiplier (Simple Deposit Multiplier= 1/RR) |
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A banking system in which banks keep less than 100% of deposits as reserve |
Fractional Reserve Banking System |
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a situation in which depositors simultaneously decide to withdraw money from a bank |
Bank Run |
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A situation in which many banks experience runs at t he same time |
Bank Panic |
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6-Characteristics of Federal Reserve |
1. Bank of last resort 2. Est. 1913 3. 12-regional banks 4. 7-Board of Governors 5. Chair is a 4yr. renewable post 6. Quasi Public/Private (banks) |
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The actions the Federal Reserve takes to manage the money supply |
Monetary Policy |
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Federal Reserve committee responsible for open market operations and managing the money supply in the US |
Federal Open Market Committee (FOMC) |
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The buying and selling of Treasury securities by the Federal Reserve in order to control the money supply |
Open Market Operations |
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Loans the Federal Reserve makes to banks |
Discount Loans |
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When the Fed reduces the required reserve ratio, it converts required reserves into excess reserves |
Reserve Requirement |
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Excess of hundreds of thousands off % points per year Destabilizes entire economy |
Hyper Inflation |
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The FOMC increases the money supply by |
Buying Treasury Securities |
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The FOMC decreases the money supply by |
Selling Treasury Securities |
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What three monetary policy tools does the Fed use to manage the money supply? |
Open Market Operations Discount Policy Reserve Requirements |
