Unit 4

Question 1

Legal tender

Answer 1

money that must be accepted by law in payment of debts

Question 2

what is money

Answer 2

anything accepted as payment

Question 3

what is fiat money

Answer 3

no intrinsic value - is accepted as a medium of exchange (gov money, coins, currency)

Question 4

Medium of exchange

Answer 4

anything that is readily acceptable as payment (non bartering)

Question 5

Three functions of money

Answer 5

medium of exchange, unit of account, store of value

Question 6

Unit of measurement/account

Answer 6

the yardstick ppl use to post prices and record debts - simplifies price comparisons

Question 7

store of value

Answer 7

item that ppl can use to transfer purchasing power from now to the future (later exchanged)

Question 8

liquidity

Answer 8

how easily smth can turn to cash

Question 9

commodity

Answer 9

intrinsic (itself is a value) gold, cigarettes

Question 10

currency

Answer 10

paper bills and coins in the hands of the public

Question 11

demand deposits

Answer 11

the bank has to pay you back whenever you want to spend the money in ur bank account

Question 12

M1 money

Answer 12

more liquid, immediately pay for things

Question 13

M2 money

Answer 13

near money, M1 + additional assets

Question 14

M3 money

Answer 14

M2 + large time deposits

Question 15

2 goals of the federal reserve

Answer 15

promotes stability and growth. also regulates quantity of money

Question 16

who determines the monetary policy

Answer 16

Federal open market committee

Question 17

How does the Fed control the economy through monetary policy

Answer 17

money supply and interest rates

Question 18

Where does money demand come from

Answer 18

households, firms, government, foreign sector. Nominal GDP

Question 19

Where does money supply come from?

Answer 19

Federal Reserve only

Question 20

What is transaction demand

Answer 20

demand for money as a medium of exchange

Question 21

What happens to the demand for money and nominal GDP when we purchase goods and services?

Answer 21

they both increase

Question 22

What is asset demand

Answer 22

demand for money as a store of value

Question 23

When we purchase assets (capital) what happens to nominal GDP and demand for money?

Answer 23

both increase

Question 24

Why is Total Money Demand downward sloping?

Answer 24

at high interest rates people are less inclined to hold money and more inclined to hold stocks & bonds

Question 25

Asset demand + transaction demand =

Answer 25

total money demand

Question 26

What does the fed use to measure money supply

Answer 26

m1, m2, m3

Question 27

what does the equilibrium of MS and MD represent

Answer 27

nominal interest rate

Question 28

what is the reserve requirement

Answer 28

the amount of a bank’s total reserves that may not be loaned out

Question 29

what happens to the money supply when the reserve requirement is increased

Answer 29

money supply decreases

Question 30

what is the limited reserves method

Answer 30

a method to control the money supply by controlling the amount of reserves the bank must keep

Question 31

what are the tools the fed can use in limited reserve method

Answer 31

reserve requirement, discount rate, fed funds rate, open market operations

Question 32

what is the discount rate

Answer 32

the interest rate the Fed charges banks for loans

Question 33

what happens to money supply when you increase the discount rate

Answer 33

decreases money supply

Question 34

what is the federal funds rate

Answer 34

interest rate that banks charge one another on overnight loans of reserves held at the Federal Reserve Bank

Question 35

what is an open market operation

Answer 35

when the fed buys from or sells a government bond