Ch.12

Question 1

Barter

Answer 1

Exchanging goods and services for other goods and services without the use of money

Question 2

Medium of exchange

Answer 2

Anything that is generally acceptable in exchange for foods and services; a function of money

Question 3

Unit of account

Answer 3

A common measure in which relative values are expressed; a function of money

Question 4

Store of value

Answer 4

The ability of an item to hold over time; a function of money

Question 5

Double coincidence of wants

Answer 5

In barter economy, requirement which must be met before a trade can be made. It specifies that trader must find another trader who at the same time is willing to trade what the first trader wants and wants what the first trader has.

Question 6

M1

Answer 6

Currency held outside banks plus checkable deposits plus traveler’s checks

M1= currency held outside banks + checkable deposits + traveler’s checks

Question 7

Currency

Answer 7

Coins and paper money

Question 8

Federal reserve notes

Answer 8

Paper money issued by the federal reserve

Question 9

Checkable deposits

Answer 9

Deposits of which checks can be written

Question 10

M2

Answer 10

M1 + saving deposits (including money market deposit accounts) + small denomination time deposits + money market mutual funds (retail)

Question 11

Saving deposits

Answer 11

An interest earning account at a commercial bank or thrift institution. Normally, checks cannot be written on saving deposits, and the funds within a saving deposit can be withdrawn at any time without penalty

Question 12

Time deposit

Answer 12

An interest earning deposit with a specified maturity date. Time deposits are subject to penalties for early withdraws. Small denomination time deposits are less than 100k

Question 13

Money market deposit account

Answer 13

Interest earning account at bank or thrift institutions for which a minimum balance is usually required and most of which offer limited check writing privileges . Only retail MMMFs are part of M2

Question 14

Fractional reserve banking

Answer 14

A banking arrangement that allows banks to hold reserves equal to only a fraction of their deposit liabilities

Question 15

Federal reserve system

Answer 15

Central bank of US

Question 16

Reserves

Answer 16

Sum of bank deposits at the fed and the vault cash

Question 17

Required reserve ratio

Answer 17

Percentage of each dollar deposited that must be held in reserve form (specifically as bank deposits at the Fed or vault cash)

Question 18

Required reserves

Answer 18

Minimum dollar amount of reserves that a bank must hold against its checkable deposits, as mandated by the Fed

Question 19

Reserve requirement

Answer 19

Fed rule that specifies the amount of reserves a bank must hold to back up deposits

Required reserves = r x checkable deposits

Question 20

Excess reserves

Answer 20

Reserves held beyond the required amount; the difference between total reserves and required reserves

Excess reserves = reserves - required reserves

Question 21

Direct finance

Answer 21

Borrowers and lenders come together in a market setting, such as in the bond market

Question 22

Indirect finance

Answer 22

Funds are loaned and borrowed through a financial intermediary

Question 23

Financial intermediary

Answer 23

They transfer funds from those who want to lend funds to those who want to borrow them

Question 24

Asymmetric information

Answer 24

Relates to an economic agent on one side of a transaction having information that an economic agent on the other side of the transaction does not have

Question 25

Adverse selection

Answer 25

Phenomenon that occurs when the parties on one side of the market, who had information that was not known to others, self-select in a way that adversely affects the parties on the other side of the market.

Question 26

Moral hazard

Answer 26

Condition that exists when one party to a transaction changed his or her behavior in a way that is hidden from and costly to the other party.

Question 27

Balance sheet

Answer 27

Record of assets and liabilities of a bank

Question 28

Asset

Answer 28

Anything of value that is owned or that one has claim to.

Question 29

Liability

Answer 29

Anything that is owed to someone else

Question 30

Insolvency

Answer 30

Condition in which one's liabilities are greater that one's assets

Question 31

Money

Answer 31

Any good that is widely accepted for purposes of exchange and payment of debt