Chapter 6 - Money and Prices

Question 1

money

Answer 1

anything that is generally acceptable in making exchanges

Question 2

barter

Answer 2

trading without the use of widely accepted means of

exchange

Question 3

double coincidence of wants

Answer 3

each person must want what the other has is a barter exchange is to occur

Question 4

functions of money:

Answer 4

1) medium of exchange
2) store of value
3) unit of account

Question 5

commodity money

Answer 5

money that has other uses (cigarettes, alcohol, sugar, gold, etc.)

Question 6

fiat money

Answer 6

money that does NOT have any other uses

Question 7

liquidity

Answer 7

the ease with which an asset can be converted to a spendable form

Question 8

M1

Answer 8

paper currency held outside banks, checking account balances, traveler’s checks ($2.9 trillion when book written)

Question 9

structure of the Fed

Answer 9

1) 7 governors: appointed by President, approved by the Senate, 14 year terms (supposed to isolate them from corruption- president can’t say he won’t reappoint if he doesn’t do what Pres says)
2) chairman, appointed by President, 4 yr term, approve by Senate

Question 10

monetary policy

Answer 10

Fed uses to change money supply in an attempt to affect the economy

Question 11

Federal Open Market Committee

Answer 11

conducts monetary policy, consists of:

1) The Board of Governors (which has seven members)
2) The President of the New York Federal Reserve Bank
3) The Presidents of the other eleven district banks, four of whom vote at each meeting on a rotating basis

Question 12

3 tools of monetary policy

Answer 12

1) open market operations
2) the required reserve ratio
3) the discount rate

Question 13

open market operations

Answer 13

buying and selling US government bonds from individuals and businesses who previously bought them from the US government. When the Fed buys bonds, bonds flow into the Fed and money flows into the economy, increasing the money supply, and vice versa

Question 14

the required reserve ratio

Answer 14

most dangerous tool of the Fed: % of deposits the bank CAN’T lend out, but must hold in reserves

Question 15

bank’s reserves

Answer 15

vault cash plus account with the Fed

Question 16

excess reserves

Answer 16

reserves banks hold in excess of those the Fed requires

Question 17

the discount rate

Answer 17

interest rate banks pay when they borrow from the Fed (the Fed is a lender of last resort)

Question 18

Federal Funds Rate

Answer 18

free market rate at which banks lend to other banks—- this is the target of the Fed in money creation

Question 19

value of the dollar in the domestic economy

Answer 19

depends on how many and which goods and services it will buy

Question 20

CPI (Consumer Price Index)

Answer 20

weighted average of prices of 200 goods commonly purchased by consumers

Question 21

PCE

Answer 21

used by Fed—-fuel and gas—–20% of household purchases