chapter 13 intro to money & banking

Question 1

money

Answer 1

a medium of exchange/means of payment, store of value (liquid), unit of account

Question 2

fiat money

Answer 2

money w no intrinsic value (not backed by gold or silver)

Question 3

different money supplies

Answer 3

m1 vs. m2

Question 4

M1

Answer 4

includes only (1) currency in the hands of the public and (2) checkable deposits (both demand and interest earning) held in depository institutions

Question 5

M2

Answer 5

M1 plus (1) savings deposits, (2) time deposits (of less than $100,000), and (3) money market mutual fund shares

Question 6

credit cards vs. money

Answer 6

credit is a liability acquired when one borrows funds; NOT MONEY - just a convenient way to get a loan

Question 7

banking

Answer 7

savings and loan institutions, credit unions, and commercial banks

Question 8

what do banks provide their depositors?

Answer 8

provide their depositors with the safekeeping of money, clearing services on checkable deposits, and interest payments on time (and some checking) deposits

Question 9

how do banks make money?

Answer 9

by extending loans and investing in interest-earning ­securities

Question 10

fractional reserve banking

Answer 10

a system that permits banks to hold reserves of less than 100 percent against their deposits

Question 11

reserve requirements

Answer 11

a minimum percentage of reserves to checking account (demand deposit) balances; established by the Federal Reserve System

Question 12

the Federal Reserve (Fed)

Answer 12

controls the US money supply, regulates the commercial banking sector, serves as a “banker’s bank” for commercial US banks

Question 13

setup of the Fed

Answer 13

at da top: Board of Governors - 7 members appointed by the President with approval by Senate - sets all the rates and regulations for the depository institutions - 14 year terms

Federal Open Market Committee (FOMC): Board of Governors + 5 others (12 total) - establishes Fed policy regarding the buying and selling of government securities

12 Federal Reserve District Banks - commercial banks, savings and loans, etc.

Question 14

three tools for controlling the money supply

Answer 14

1. reserve requirements (can directly increase the excess reserves by changing the money multiplier)
2. open market operations (Fed buys or sells government securities on the open market)
3. the extension of loans to banks at the “discount rate” (when the Fed lowers the rate and loans more to banks the monetary base and money supply both increase​)

Question 15

monetary equation

Answer 15

MV = PQ

M = money supply (m1 or m2)
V = income velocity of money
P = general price level (GDP deflator)
Q = output (real GDP)

Question 16

money multiplier

Answer 16

1/reserve requirement