Chapter 11- The Monetary System

Question 1

Medium of Exchange

Answer 1

An asset that can be traded for goods and services.

Question 2

Money

Answer 2

An asset that people use to make and receive payment when buying and selling goods and services.

Question 3

What 3 functions does money serve?

Answer 3

• A medium of exchange
• A store of value
• A unit of account

Question 4

Store of value

Answer 4

An asset that enables people to transfer purchasing power into the future

Question 5

Unit of account

Answer 5

A universal yardstick that is used to express relative prices of goods and services

Question 6

Fiat Money

Answer 6

An asset that is used as legal tender by government decree and is not backed by a physical commodity like gold.

Question 7

The money supply (M2)

Answer 7

The sum of currency in circulation, checking accounts and other types of accounts.

Question 8

Monetary measure is calculated by

Answer 8

Currency in circulation/GDP and Money Supply/GDP

Question 9

Nominal GDP

Answer 9

The total value of production using the prices from the same year .

Question 10

Real GDP

Answer 10

The total value of production using fixed prices taken from a particular base year.

Question 11

Quantity Theory of Money

Answer 11

Money Supply/ Nominal GDP = Constant

Question 12

A constant ratio is a good approximation of how an economy

Answer 12

Behave in the long run

Question 13

The growth rate of money supply= growth rate of nominal GDP is the same as

Answer 13

Growth rate of money supply = inflation rate + growth rate of real GDP

Question 14

Growth rate of money supply =

Answer 14

Inflation rate + Growth rate of real GDP

Question 15

Inflation rate=

Answer 15

Growth rate of money supply- growth rate of real GDP

Question 16

When does long term inflation occur?

Answer 16

When there is a positive gap between growth in money supply and real GDP

Question 17

Inflation

Answer 17

A situation of rising prices

Question 18

Deflation

Answer 18

A situation of falling prices (negative inflation)

Question 19

Hyperinflation

Answer 19

A situation of extreme inflation where prices double within three years.

Question 20

Do all wages and prices move together during inflation?

Answer 20

No

Question 21

Relative prices

Answer 21

Wages compared to the price of a good .

Question 22

Who wins from unexpected inflation ?

Answer 22

Borrowers

Question 23

Who loses from unexpected inflation?

Answer 23

Savers and Lenders

Question 24

Banks receiving payments on a mortgage of fixed interest or a retiree receiving a pension

Answer 24

All lose during an inflation.

Question 25

What does the central bank do ?

Answer 25

Monitor Financial institutions - control certain key interest rates - indirectly controls the money supply

Question 26

What activities encompass the central bank?

Answer 26

Monetary Policy

Question 27

What is the Federal Reserve Bank?

Answer 27

The central bank of the United States

Question 28

What parts are the fed composed of?

Answer 28

12 District banks throughout the country 7 Board of governors 12 Federal open market committee

Question 29

What does the central bank do ?

Answer 29

Influences short term interest rates Influences Money Supply Influences Long Term Real interest rates

Question 30

What are bank reserves?

Answer 30

The combination of deposits that private banks hold at the central bank and cash in their vaults which provide liquidity to private banks.

Question 31

Liquidity

Answer 31

The funds and assets that can be used immediately to conduct transactions.

Question 32

Federal Funds Market

Answer 32

The market where banks borrow and lend reserve to one another

Question 33

Federal Funds Rate

Answer 33

The 24hour interest rate charged in the market

Question 34

Demand curve for reserves

Answer 34

This curve plots the total quantity of reserves demanded by private banks for each level of the federal funds rate.

Question 35

Why does the demand curve for reserves slope downward?

Answer 35

Because optimizing banks choose to hold more reserves as the cost of those reserves.

Question 36

When does the demand curve for bank reserves shift?

Answer 36

``` When there is Economic Expansion Changing deposit base Changing reserve requirement Changing interest paid by the fed for deposits at the fed ```

Question 37

An economic contraction decrease bank lending. What happens to the curve?

Answer 37

The curve moves to the left because they are not to lend as much money .

Question 38

What is supply curve for reserves?

Answer 38

Plots the quantity of reserves supplied by the federal reserve via market operations.

Question 39

Open Market Purchase

Answer 39

Where the fed buys government bonds from private banks and in return give the private banks more reserves.

Question 40

Open Market Sale

Answer 40

The fed sells the government bonds to private banks and in return the private banks give some of their reserves.

Question 41

What does the supply curve for reserves plot?

Answer 41

The quantity of reserves supplied by the federal reserve.

Question 42

Which way do the supply curve for reserves go ?

Answer 42

It goes vertical because the federal reserves supplies reserves not to earn economic profits .

Question 43

Can the federal reserve control either the quantity of reserves or the federal funds rate ?

Answer 43

NEEEOOOPPPEEE..

Question 44

How can the fed shift demand curve for reserves?

Answer 44

By changing the reserve requirement and by changing interest paid on reserves

Question 45

How can the fed shift supply curve reserves?

Answer 45

By using open market operations

Question 46

What happens when the fed manipulates the nominal interest rate?

Answer 46

It affects rates charged by banks on loans therefore rectifying the point that the fed is in direct control over the nominal interest rates.

Question 47

How does the fed influence long term interest rates?

Answer 47

Long term loans are the same as lots of short run loan so when you change the short tem interest rate it will also affect the long term interest rate (at a smaller amount)