Chapter 04

Question 1

Money

Answer 1

the stock of assets that can be readily used to make transactions.

Question 2

Store of Value

Answer 2

A way of transferring purchasing power from the present to the future; one of the functions of money.

Question 3

Unit of Account

Answer 3

the measure in which prices and other accounting records are recorded; one of the functions of money.

Question 4

Fiat Money

Answer 4

Money that is not intrinsically useful and is valued only because it is used as money.

Question 5

Commodity Money

Answer 5

Money that is intrinsically useful and would be valued even if it did not serve as money.

Question 6

Gold Standard

Answer 6

A monetary system in which gold serves as money or in which all money is convertible into gold at a fixed rate.

Question 7

Money Supply

Answer 7

the amount of money available, usually as determined by the central bank and the banking system.

Question 8

Monetary Policy

Answer 8

the central bank’s choice regarding the supply of money.

Question 9

Central Bank

Answer 9

the institution that is responsible for the conduct of monetary policy, such as the Federal Reserve in the United States.

Question 10

Federal Reserve (the Fed)

Answer 10

the Central Bank of the United States.

Question 11

Open-market operations

Answer 11

the purchase or sale of government bonds by the central bank for the purpose of increasing or decreasing the money supply.

Question 12

Currency

Answer 12

the sum of outstanding paper money and coins.

Question 13

Demand Deposits

Answer 13

Assets that are held in banks and can be used on demand to make transactions, such as checking accounts.

Question 14

Reserves

Answer 14

the money that banks have received from depositors but have not used to make loans.

Question 15

100-percent-reserve banking

Answer 15

A system in which banks keep all deposits on reserve.

Question 16

Balance Sheet

Answer 16

an accounting statement that shows assets and liabilities.

Question 17

Fractional-reserve banking

Answer 17

A system in which banks keep only some of their deposits on reserve

Question 18

Financial Intermediation

Answer 18

the process by which assets are allocated from those individuals that wish to save some of their income for future consumption to those individuals and firms who wish to borrow to buy investment goods for future production.

Question 19

Bank Capital

Answer 19

the resources the bank owners have put into the institution

Question 20

Leverage

Answer 20

the use of borrowed money to supplement existing funds for purposes of investment.

Question 21

Capital requirement

Answer 21

A minimum amount of bank capital mandated by regulators.

Question 22

Monetary base

Answer 22

the sum of currency and bank reserves; also called high-powered money.

Question 23

Reserve-deposit ratio

Answer 23

the ratio of amount of reserves banks choose to hold to the amount of demand deposits they have.

Question 24

Currency-deposit ratio

Answer 24

the ratio of the amount of currency that people choose to hold to the amount of demand deposits they hold at banks.

Question 25

Money multiplier

Answer 25

the increase in the money supply resulting from a one-dollar increase in the monetary base.

Question 26

High-powered money

Answer 26

the sum of currency and bank reserves; also called the monetary base.

Question 27

Discount rate

Answer 27

the interest rate that the Fed charges when it makes loans to banks.

Question 28

Reserve requirements

Answer 28

Regulations imposed on banks by the Central bank that specify a minimum reserve-deposit ratio.

Question 29

Excess reserves

Answer 29

Reserves held by banks above the amount mandated by reserve requirements.

Question 30

Interest on reserves

Answer 30

the central bank’s policy of paying banks and interest rate for the deposits that they hold as reserves.