Chappter 6: Money & Monetary Policy

Question 1

is anything generally accepted as a means of paying for goods and services and for paying off debts.

Answer 1

Money

Question 2

True or False

For something to serve successfully as money, it must be easily divisible so that exchanges can take place in small or large quantities, relatively inexpensive to store and transfer, and reasonably stable in value over time.

Answer 2

True

Question 3

True or False

Money is more convenient than the barter.

Answer 3

True

Question 5

Goods trade for goods.; Necessary to find someone who not only has what you want, but also wants what you have.

Answer 5

Barter Exchange

Question 6

True or False

money has become the unit of account in which prices of goods and services are expressed.

Answer 6

True

Question 7

• Money will always be accepted as payment.
• Money is always on one side of the transaction.
• People with money only need to find someone who has and want to trade what they
  want.

Answer 7

Monetary Exhange

Question 8

whose value comes from the commodity from which it is made.

Answer 8

Commodity money

Question 9

commodity-backed money.

Answer 9

Representative money

Question 10

whose value comes from the relationship between supply and demand and the stability of the issuing government.

Answer 10

Fiat money

Question 11

True or False

What form money takes has varied by region and historical period.

Answer 11

True

Question 12

Around 1450 in Europe, _______, _______, & ________ coins were used as money.

Answer 12

gold, silver, and copper

Question 13

the earliest known civilization to use gold coins was the old ____________.

Answer 13

Roman Empire.

Question 14

True or False

The problem with commodity money is that it restricts the capability of governments to finance wars and other public expenditures.

Answer 14

True

Question 15

True or False

Gold and silver commodities are just scarce, thus their precious value. This problem led to the invention of the first “representative money”. Rather than paying the armies in gold, the ancient kings and emperors decided to pay soldiers by issuing pieces of paper that were promises to deliver gold on request.

Answer 15

True

Question 16

Use of paper money began around __________ in Europe when goldsmiths in London issued notes exchanged for gold.

Answer 16

1660

Question 17

where banks hold only a fraction of their total deposits their reserve deposits in gold coins in that era of gold standard.

Answer 17

fractional reserve banking

Question 18

are coins with metal contents worth less than the monetary value of the coins.

Answer 18

Token coins

Question 19

is paper money issued by governments not redeemable in fixed amounts of gold or silver commodities, but has value by government fiat (i.e., the government declares them as legal tender).

Answer 19

Fiat money

Question 20

The Three Basic Functions of Money

Answer 20

• Serving as a medium of exchange
• A store of value
• A standard of value

Question 21

True or False

In the barter exchange period, tables of relative values were developed from experience. Such as the number of furs, measures of grain, or amount of cloth agreed to equal one cow.

Answer 21

True

Question 22

is the amount of goods and services that can be purchased with a unit of money.

Answer 22

Purchasing power

Question 22

money may be spent immediately after receipt or held over time.

Answer 22

store of value

Question 22

the need for simpler means of exchange invented money, with its relatively low storage and transfer costs as a _____________-.

Answer 22

medium of exchange

Question 22

True or False Money can perform its function as a store of value only if its purchasing power is relatively stable over time.

Answer 22

True

Question 23

reduces the purchasing power of money, that is the increase of prices of goods and services not off set by increases in quantity or quality.

Answer 23

Inflation

Question 24

reduce the need for holding money itself as a store of value.

Answer 24

Liquid assets

Question 25

Money as a ______________ means that prices and contracts for deferred payments are expressed in terms of a monetary unit

Answer 25

standard of value

Question 26

is measured by “counting” the money supply in the financial system as of a point in time, this can also be viewed as the amount of money stock on a particular date.

Answer 26

Money Supply or stock

Question 27

meaning they had metal content equal to their monetary value.

Answer 27

Full bodied coins

Question 27

In that period, few countries used paper money and China in fact stopped using paper money after _______________.

Answer 27

five hundred years

Question 28

discovered that their paper notes circulated and only some returned for redemption in gold.

Answer 28

Goldsmiths

Question 29

more paper notes could be issued than the gold to back them.

Answer 29

Representative commodity money

Question 30

are just scarce, thus their precious value.

Answer 30

Gold and silver commodities

Question 30

The problem with commodity money is that it _______________ of governments to finance wars and other public expenditures

Answer 30

restricts the capability

Question 30

is a broader measure than M1 because it emphasizes money as a store of value in addition to its function as a medium of exchange.

Answer 30

M2 money supply

Question 30

is defined by the U.S. Fed as the money supply consisting only of currency, traveler’s checks, demand deposits, and other checkable deposits at depository institutions.

Answer 30

M1 Money Supply

Question 31

In general terms, the _______________ includes M1 plus highly liquid financial assets, including savings accounts, small time deposits, and retail money market mutual funds.

Answer 31

M2 money supply

Question 32

True or False Economists have observed that economic activity, money supply, and the price levels of goods and services generally move together over time.

Answer 32

True

Question 33

True or False Many economists believe that economic activity matters when they try to manage money supply.

Answer 33

False (Many economists believe that money supply matters when they try to manage economic activity.)

Question 34

is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.

Answer 34

Gross Domestic Product (GDP)

Question 35

As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health.

Answer 35

Gross Domestic Product (GDP)

Question 36

provides an economic snapshot of a country, used to estimate the size of an economy and growth rate.

Answer 36

Gross Domestic Product (GDP)

Question 37

can be calculated in three ways, using expenditures, production, or incomes. It can be adjusted for inflation and population to provide deeper insights.

Answer 37

Gross Domestic Product (GDP)

Question 38

____________ takes account the effects of inflation while ____________ does not.

Answer 38

Real GDP; nominal GDP

Question 39

is a key tool to guide policymakers, investors, and businesses in strategic decision-making.

Answer 39

Gross Domestic Product (GDP)

Question 39

The expenditure approach, also known as the _______________,

Answer 39

spending approach

Question 39

calculates spending by the different groups that participate in the economy.

Answer 39

expenditure approach

Question 40

The U.S. GDP is primarily measured based on the ______________.

Answer 40

expenditure approach

Question 41

Expenditure approach can be calculated using the following formula: _________________

Answer 41

GDP = C + G + I + NX

Question 42

___ = private consumption expenditures or consumer spending;

Answer 42

C

Question 43

___ = government consumption expenditure and gross investment;

Answer 43

G

Question 44

__ = private domestic investment or capital expenditures; and

Answer 44

I

Question 45

____ = net exports formula subtracts total imports from total exports (___ = Exports - Imports)

Answer 45

NX

Question 46

measures the economic activity within the physical borders of a country (whether the producers are native to that country or foreign-owned entities).

Answer 46

GDP

Question 47

measures the overall production of people or corporations native to a country, including those based abroad (excludes domestic production by foreigners).

Answer 47

GNP

Question 47

Types of Monetary Policy

Answer 47

1. Contractionary 2. Expansionary

Question 48

is the sum of all income earned by citizens or nationals of a country (regardless of whether the underlying economic activity takes place domestically or abroad).

Answer 48

GNI

Question 49

increases interest rates and limits the outstanding money supply to slow growth and decrease inflation, where the prices of goods and services in an economy rise and reduce the purchasing power of money.

Answer 49

contractionary policy

Question 50

During times of slowdown or a recession, an _________________ grows economic activity. By lowering interest rates, saving becomes less attractive, and consumer spending and borrowing increase.

Answer 50

expansionary policy

Question 51

Goals of Monetary Policy

Answer 51

1. Inflation 2. Unemployment 3. Exhange rates

Question 52

An expansionary monetary policy decreases _____________ as a higher money supply and attractive interest rates stimulate business activities and expansion of the job market.

Answer 52

unemployment

Question 53

The ______________ between domestic and foreign currencies can be affected by monetary policy. With an increase in the money supply, the domestic currency becomes cheaper than its foreign exchange.

Answer 53

exchange rates

Question 54

Contractionary monetary policy is used to target a high level of _____________ and reduce the level of money circulating in the economy.

Answer 54

inflation

Question 55

Tools of Monetary Policy

Answer 55

1. Open market Operations 2. Interest Rates 3. reserve requirements

Question 56

the central bank buys bonds from investors or sells additional bonds to investors to change the number of outstanding government securities and money available to the economy as a whole.

Answer 56

Open market Operations

Question 56

The central bank may change the _______________ or the required collateral that it demands.

Answer 56

interest rates

Question 57

Authorities can manipulate the _______________, the funds that banks must retain as a proportion of the deposits made by their customers to ensure that they can meet their liabilities.

Answer 57

reserve requirements

Question 57

this rate is known as the discount rate. Banks will loan somewhat freely depending on this ____________.

Answer 57

interest rate

Question 58

is enacted by a central bank to sustain a level economy and keep unemployment low, protect the value of the currency, and maintain economic growth

Answer 58

Monetary policy

Question 59

is an additional tool used by governments and not central banks. While the central bank can influence the supply of money in the economy, the treasury department can create new money and implement new tax policies.

Answer 59

Fiscal Policy