Chapter 6.1

Question 1

What did Adam Smith say about the wealth of a country?

Answer 1

“The wealth of a country consists, not in its gold and silver only, but in its lands, houses, and consumable goods off all different kinds”

Question 2

Money makes it appearance only to…

Answer 2

facilitate the arrangement among several parties

Question 3

Money

Answer 3

Anything that is generally acceptable in making exchanges, so that people who make pizzas for a living and want to buy gas can see for money and buy with money.

Question 4

Barter

Answer 4

Trading without the use of widely accepted means of exchange.

Question 5

Double Coincidence of Wants

Answer 5

Must be present to exchange using a barter

Question 6

Money developed because…

Answer 6

It was superior to barter, since double coincidence of wants is a terrible inconvenience.

Question 7

Smith lists the following commodities that evolved into money:

Answer 7

Labor (the original common medium of exchange) 
Cattle (early societies)
Salt (early societies, including Rome)
Cowry shells (India)
Cod (Newfoundland) 
Tobacco (early Virginia) 
Sugar (West Indies) 
Iron (Sparta)
Copper (Rome)
Gold and silver (many societies throughout history)

Question 8

Strangest forms of money ever?

Answer 8

Rai stone on Pacific island of Yap.

Question 9

In the past, cigarettes were used as money in…

Answer 9

US prisons, but now other goods, notably mackerel are used

Question 10

A good is more likely to evolve into money if it fulfills the following…

Answer 10

Functions of Money

Question 11

Functions of Money

Answer 11

Medium of exchange, Unit of account, & store of value

Question 12

Medium of exchange

Answer 12

It is generally acceptable and convenient for exchange

Question 13

Unit of account

Answer 13

Each unit of it is “worth” the same amount

Question 14

Store of value

Answer 14

It retains value over time

Question 15

Commodity Money

Answer 15

When money might have other uses, such as the items in Smith’s list

Question 16

Fiat Money

Answer 16

Money might not have any other use

Question 17

Wellspring of all US dollars is…

Answer 17

Federal Reserve System & banking system

Question 18

Liquidity (measure if money supply)

Answer 18

The ease with which an asset can be converted to spendable form

Question 19

M1 (M One)

Answer 19

Most referenced measurement. Is the sum of paper currency held outside banks, checking account balances, & travelers’ checks (nearly obsolete)

Question 20

M1 is about how much?

Answer 20

$2.9 Trillion

Question 21

Total income received in our economy is now about how much?

Answer 21

$17.3 trillion

Question 22

US Federal Reserve created in

Answer 22

1913, they create every US dollar that exists in world

Question 23

US Federal Reserve established to…

Answer 23

Stabilize the banking system though being a lender of last resort to troubled banks

Question 24

State wanted to take control of…

Answer 24

Process of handling banking crises that used to be handled by large banks, such as J. P. Morgan.

Question 25

Within 15 years, what did Fed errors do?

Answer 25

Caused huge deflation that is now credited by Friedman, Hayek, Mises, and many other economists as the root cause of the Great Depression.

Question 26

Does the Fed depend on congress for budget?

Answer 26

No, it finances itself.

Question 27

What was the Fed intended to be?

Answer 27

Government business partnership with shared governance

Question 28

Business of various regions of the US were to be represented by...

Answer 28

12 district banks

Question 29

District banks today have...

Answer 29

minor voice in Fed

Question 30

Government interests are represented by board of governors which includes..

Answer 30

Seven governors, appointed by the President with the advice and consent of the Senate, who serve fourteen year terms. • A chairman, who is appointed by the US President every four years, who must also face confirmation by the US Senate.

Question 31

Monetary policy

Answer 31

The Fed uses the money supply to attempt to affect the economy.

Question 32

Federal Open Market Committee

Answer 32

Conducts monetary policy

Question 33

Who the is Federal Open Market Committee composed of?

Answer 33

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

Question 34

Although the majority rules, the Fed chairman's recommendations are almost always...

Answer 34

Adopted unanimously because voting against the chairman is looked down upon

Question 35

Three tools of monetary policy

Answer 35

Open Market Operations, The Required Reserve Ratio, & The Discount Rate

Question 36

Open Market Operations

Answer 36

Buying and selling US govt. bonds from individuals and businesses who previously bought them from the US govt. When Feds buy bonds, bonds flow into the Fed and money flows into the economy, increasing money supply.

Question 37

The Required Reserve Ratio

Answer 37

Fed sets the required reserve ratio, which is % of deposits that banks can't lend out, but most hold as reserves

Question 38

Bank's reserves

Answer 38

Consist of its vault cash plus the bank's account with the Fed

Question 39

Excess reserves

Answer 39

Reserves that banks hold in excess of those the Feds require

Question 40

Bank can lend out excess reserves when?

Answer 40

Any time

Question 41

Current required reserve ratio?

Answer 41

10%

Question 42

With a lower required reserve ratio, banks can...

Answer 42

Lend more, and vice versa

Question 43

Money inside bank vaults or at the Fed is NOT part of the money supply...

Answer 43

While money in households and businesses IS part of the money supply

Question 44

Discount Rate

Answer 44

Fed was created to be a lender of last resort. That is, they are the final stop that a bank makes for an emergency loan before it fails.

Question 45

The Discount Rate (definition)

Answer 45

When a bank borrows from the Fed, is pays interest rate called the discount rate which the Fed sets by command

Question 46

Federal Funds Rate

Answer 46

Free market rate at which banks lend to other banks

Question 47

If the Fed puts money into the banking system...

Answer 47

It is easier to borrow, so the Federal Funds Rate falls.

Question 48

Lowered interest rate by 1 point means...

Answer 48

Increase the money supply until the free market Federal Funds Rate falls by 1 point

Question 49

Fed prefers to use...

Answer 49

Open Markets

Question 50

Officials at the Fed will not admit to any bounds on their authority to...

Answer 50

Buy and sell in the marketplace.

Question 51

For any change in excess reserves...

Answer 51

Expansion of the money supply, throughout the banking system, is the size of the injection multiplied by the money multiplier

Question 52

Value of the dollar in the domestic economy depends on...

Answer 52

How many and which goods and services it will buy

Question 53

Consumer Price Index (CPI)

Answer 53

Each month, Bureau of Labor Statistics (BLS) measures prices of 200 goods that a typical consumer buys, from a fancy market parakeet, to a rental payment on a home, etc...

Question 54

The measurement of CPI is...

Answer 54

Weighted average of the prices- weighted by the amounts of the goods that consumers purchase.

Question 55

PCE Price Index (Personal Consumption Expenditures Index)

Answer 55

Federal Reserve's measure, which excluded food, fuel, which make up 20% of household purchases.