ECON CH 10

Question 1

barter

Answer 1

the exchange of one good for another

Question 2

double coincidence of wants

Answer 2

the unlikely occurrence that two people each have a good the other wants

Question 3

money

Answer 3

a medium of exchange, a means of payment: what sellers generally accept and buyers generally use to pay for goods and services

Question 4

three major functions of money

Answer 4

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

Question 5

medium of exchange

Answer 5

an item buyers give to sellers when they buy G&S

Question 6

unit of account

Answer 6

a standard unit that provides a consistent way of quoting prices and record debts

Question 7

store of value (saving)

Answer 7

an item people can use to transfer purchasing power from the present to the future (to save)

Question 8

commodity monies

Answer 8

items used as money that also have intrinsic value in some other uses (gold, diamonds, cigs)

Question 9

fiât or token money

Answer 9

items designated as money that are intrinsically worthless (the US dollar bill)

Question 10

money supply

Answer 10

the quantity of money available in the economy to cover all the transactions

Question 11

M1

Answer 11

includes currency (cash) in circulation, demand deposits, travelers checks, and other checkable deposits

Question 12

M2

Answer 12

everything in M1 plus savings deposits, small time deposits, money market mutual funds, and a few other minor categories

Question 13

MS

Answer 13

=currency+deposits

Question 14

no change

Answer 14

M1 goes down, what happens to M2

Question 15

M1

Answer 15

also known as transactions money

Question 16

M2

Answer 16

also known as Broad money

Question 17

M1

Answer 17

what is more liquid? M1 or M2?

Question 18

M2

Answer 18

what is more stable? M1 or M2?

Question 19

financial intermediaries

Answer 19

are banks and other financial institutions that act as links between those who have money to lend and those who want to borrow money (commercial banks, life insurance, pension funds, and saving and loan associations)

Question 20

1. overseas the banking system

2. makes the monetary policy

Answer 20

the FEDs 2 major tasks

Question 21

monetary policy

Answer 21

actions undertaken by the FED to control (change) the supply of money and the cost of money (interest rate) to help stabilize the economy

Question 22

required reserves

Answer 22

the FED requires that banks should hold (not loan out) a certain fraction (of their deposits)

Question 23

excess reserves=

Answer 23

reserves-required reserves

Question 24

required reserves=

Answer 24

%required reserve ration X deposits

Question 25

loan up

Answer 25

banks make this to the point where its excess reserves are zero

Question 26

excess reserves

Answer 26

used by banks to make loans

Question 27

reserve requirement ration (RRR)

Answer 27

the fraction (percentage) of deposits that banks hold as reserves with the FED

Question 28

RRR example

Answer 28

RRR=10% means that if a bank receive a deposit of $100 then $10 will be hold as reserve and $90, the excess reserve, is loaned out to investors

Question 29

increase in MS

Answer 29

an increase in bank reserves leads to a greater that one-for-one increase in what

Question 30

money multiplier

Answer 30

the relationship between the final change in MS and the change in reserves that caused this change

Question 31

money multiplier

Answer 31

the multiple by which MS can increase for every dollar increase in reserves

Question 32

1/RRR

Answer 32

money multiplier formula

Question 33

FED

Answer 33

the central bank of the USA

Question 34

lender last resort

Answer 34

the FED provides funds to troubled banks that cannot find any other sources of funds

Question 35

open market operations

Answer 35

are the purchases and sales by the Fed of gov securities (bills and bonds) in the open market

Question 36

MS goes down

Answer 36

when Fed sells bonds, what happens to MS

Question 37

MS goes up

Answer 37

when Fed buys bonds, what happens to MS

Question 38

1. changing the RRR 2. changing the discount rate 3. engaging in the open market operations

Answer 38

three tools available for the Fed to change the MS

Question 39

RRR

Answer 39

establishes a link between banks` reserves and the deposits the commercial banks are allowed to create in the banking system

Question 40

decrease RRR

Answer 40

if the Fed wants to increase MS, they increase or decrease RRR (which allows banks to create more deposits by loaning out more money)

Question 41

higher money multiplier

Answer 41

a lower RRR means

Question 42

discount rate

Answer 42

interest rate that banks pay to the Fed when they borrow money from Fed

Question 43

increases the MS

Answer 43

when a bank borrows from the Fed, it increases the reserves in the banking system which does what to the MS

Question 44

increases the MS

Answer 44

the lower the discount rate, the lower the cost of borrowing from the Fed, thus banks will borrow more and lend out more, doing what to the MS

Question 45

banks borrow more

Answer 45

if the discount rate is down then banks borrow more or less?

Question 46

money eliminates the "double coincidence of wants" problem

Answer 46

the development of money as a medium of exchange has facilitated the expansion of economic activity because

Question 47

decrease M1 and not change M2

Answer 47

dude transfers $2500 from his checking account to his savings. this transaction will do what to M1 and M2

Question 48

multiply $750 by 30%=$225

Answer 48

$750 in deposits and RRR= 30%

Question 49

loaned up

Answer 49

when a bank has no excess reserves, and thus can make no more loans, it is what

Question 50

- discount rate - open market operations - RRR

Answer 50

three instruments used in the Fed to change the MS

Question 51

will increase the MS

Answer 51

a decrease in the RRR will do what to the MS

Question 52

buying gov securities in the open market

Answer 52

what action by the Fed is designed to increase the MS

Question 53

decrease, decrease

Answer 53

an open market sale of securities by the Fed results in ------- in reserves and ------in the supply of money (increase or decrease)

Question 54

bonds go up

Answer 54

interest rates go up, what happens to bonds

Question 55

money goes up

Answer 55

interest rates go down, what happens to money