F: Chapter 29

Question 1

money

Answer 1

set of assets in an economy that people use to buy goods and services

Question 2

3 functions of money

Answer 2

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

Question 3

medium of exchange

Answer 3

an item that buyers give to sellers when they want to purchase goods and services
- anything that is readily acceptable as payment

Question 4

unit of account

Answer 4

yardstick people use to post prices and record debts

Question 5

store of value

Answer 5

something that has value and can be retrieved overtime

Question 6

liquidity

Answer 6

the ease with which an asset can be converted into the economy’s medium of exchange

Question 7

commodity money

Answer 7

item would have value even if it was not used as money

- takes the form of a commodity with built-in value

Question 8

fiat money

Answer 8

money used because government decree (order)

does not have intrinsic (built in) value

Question 9

Currency

Answer 9

paper bills and coins in the hands of the public

Question 10

demand deposits

Answer 10

balances in bank accounts that depositors can access on demand by writing a cheque or using a debit card

Question 11

central bank

Answer 11

institution designed to oversee the banking system and regulate the quantity of money in the economy

Question 12

money supply

Answer 12

quantity of money available in the economy

prices rise when to much money is printed

Question 13

monetary policy

Answer 13

set of actions taken by the central bank in order to affect the money supply
- determines the size and rate of growth of the money supply which in turn affects interest rates

Question 14

reserves

Answer 14

deposits that banks have received but have not loaded out

Question 15

fractional-reserve banking system

Answer 15

banks hold a fraction of the money deposited as reserves and lend out the rest
- when a bank makes a loan from its reserves, the money supply increases

Question 16

reserve ratio

Answer 16

the fraction of deposits that banks hold as reserves

Question 17

money multiplier

Answer 17

amount of money the banking system generates with each unit of reserves

Question 18

money multiplier formula

Answer 18

M = 1/R
m = multiplier
r = reserve requirement

Question 19

open-market operations

Answer 19

when the central banks buy or sell government bonds to the public

• when they buy money supply increases increases
• when they sell money supply decreases

Question 20

changing the reserve requirement

Answer 20

regulations on the minimum amount of reserves that banks must hold against deposits

• increasing the reserve requirement decreases the money supply
• decreasing the reserve requirement increases the money supply

Question 21

changing the refinancing rate

Answer 21

the interest rate the ECB lends on a short-term basis to the euro area banking sector

• increasing the refinancing rate decreases the money supply
• decreasing the refinancing rate increases the money supply