unit 4 test

Question 1

financial sector:

Answer 1

individuals, businesses, and governments borrow and save so they need institutions to help

Question 2

assets:

Answer 2

anything tangible or intangible that has value

Question 3

interest rate:

Answer 3

the amount a lender charges borrowers for borrowing money

Question 4

interest-bearing assets:

Answer 4

assets that earn interest over time

ex: bonds

Question 5

investment:

Answer 5

business spending on tools and machinery

decreases in interest rate = increase in investments

Question 6

liquidity:

Answer 6

the ease with which an asset can be converted to a medium of exchange

Question 7

bonds:

Answer 7

(securities)

- loans or IUDs that represent debt that the government, businesses, or individuals must repay to the lender

Question 8

stocks:

Answer 8

(equities)
- represent ownership of a corporation and the stockholder is often entitled to a portion of the profit paid out as dividers

Question 9

bond prices and interest rates:

Answer 9

• bond prices and interest rates are inversely related

- when you buy a bond you want the interest rate to be as high as possible

Question 10

the barter system:

Answer 10

goods and services are traded directly - there is no money exchanged

Question 11

money:

Answer 11

anything that is generally accepted as payment for goods and services - money is NOT the same as wealth or income

Question 12

wealth:

Answer 12

total collection of assets

Question 13

income:

Answer 13

flow of earnings per unit of time

Question 14

commodity money:

Answer 14

something that performs the function of money and has intrinsic value

Question 15

fiat money:

Answer 15

something that serves as money, but has no other value or uses

Question 16

three functions of money:

Answer 16

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

Question 17

what makes money effective?

Answer 17

1. generally accepted
2. scarce
3. portable and dividable

Question 18

purchasing power of money:

Answer 18

the amount of goods and services a unit of money can buy

Question 19

inflation:

Answer 19

decreases purchasing power

Question 20

hyperinflation:

Answer 20

decreases acceptability

Question 21

skip

Answer 21

skip

Question 22

M1 (highest liquidity):

Answer 22

1. currency in circulation
2. checkable bank deposits
3. travelers checks

Question 23

M2 (near-moneys):

Answer 23

1. savings deposits
2. time deposits
3. money market funds

Question 24

fractional reserve banking:

Answer 24

when banks hold a portion of deposits to cover potential withdrawals and then loans the rest of the money out

Question 25

demand deposits:

Answer 25

money deposited into a commercial bank in a checking account

Question 26

required reserves:

Answer 26

the percent that banks must hold by law

Question 27

excess reserves:

Answer 27

the amount that the bank can loan out

Question 28

asset:

Answer 28

something you own

Question 29

liability:

Answer 29

something you owe

Question 30

balance sheet:

Answer 30

a record of a bank’s assets, liabilities, and net worth

Question 31

the demand for money:

Answer 31

1. transaction demand for money: people hold money for everyday transactions
2. asset demands for money: people hold money since it is less risky than other assets

Question 32

money demand shifters:

Answer 32

1. change in price level
2. change in consumer income
3. change in technology

Question 33

the supply of money:

Answer 33

• the U.S. money supply is set by the central bank and is independent from the interest rate
• vertical line

Question 34

monetary policy:

Answer 34

the fed is a nonpartisan government office that adjusts the money supply to influence the economy

Question 35

how changes in the money supply affect aggregate demand:

Answer 35

increasing the money supply:
increase money supply = decrease interest rate, increase investment, increase AD

decreasing the money supply:
decreasing the money supply = increase interest rate, decrease investment, decrease AD

Question 36

three shifters of money supply:

Answer 36

1. the reserve requirement
2. the discount rate
3. open market transactions

Question 37

fractional reserve banking:

Answer 37

only a small percent of your money is held in reserve - the rest of your money has been loaned out

Question 38

the reserve requirement:

Answer 38

% of deposits that banks must hold in reserve

Question 39

if there is a recession, the Fed should:

Answer 39

decrease reserve ratio:

1. banks hold less money and have more excess resources
2. banks create more money by loaning out excess:
3. money supply increases, interest rates fall, AD increases

Question 40

if there is inflation, the Fed should:

Answer 40

increase reserve ratio:

1. banks hold more money and have fewer excess resources
2. banks create less money
3. money supply decreases, interest rates go up, AD decreases

Question 41

the discount rate:

Answer 41

the interest rate that the Fed charges commercial banks

Question 42

to increase the money supply the Fed should:

Answer 42

• decrease the discount rate

- buy government securities

Question 43

to decrease the money supply, the Fed should:

Answer 43

• increase discount rate

- sell government securities

Question 44

open market operations:

Answer 44

when the Fed buys or sells government bonds (securities) - this is the most important and widely used monetary policy

Question 45

federal funds rate:

Answer 45

interest rate that banks charge one another for one-day loans of reserves

Question 46

monetary policy and AD-AS:

increasing the money supply:

Answer 46

1. interest rate decreases
2. investment increases
3. AD, GDP, and PL increases

Question 47

monetary policy and AD-AS:

decreasing the money supply:

Answer 47

1. interest rate increases
2. investment decreases
3. AD, GDP, and PL decreases

Question 48

real interest rate:

Answer 48

borrowers and lenders focus on the real interest rates since it represents their real rate of return

Question 49

savings:

Answer 49

savings is what makes lending possible so the supply of loanable funds is the amount of money that is saved

Question 50

national savings:

Answer 50

public and private savings

Question 51

foreigners and supply:

Answer 51

foreigners also lend so the supply of loanable funds also depends on the amount of money that enters or leaves the country

Question 52

capital inflow:

Answer 52

the amount of money entering the country

Question 53

capital outflow:

Answer 53

the amount of money leaving the country

Question 54

net capital inflow:

Answer 54

inflow - outflow

a change in net capital inflow will shift the supply of loanable funds

Question 55

investing and demand:

Answer 55

borrowing = the demand of loanable funds

Question 56

private investment:

Answer 56

borrowing by businesses and consumers

Question 57

government borrowing:

Answer 57

deficit spending when government spending is greater than tax revenue

Question 58

loanable funds market

demand for loans come from:
supply for loans come from:

Answer 58

• borrowers/investors

- lenders/savers

Question 59

loanable funds market:

demand shifters:

Answer 59

1. change in borrowing by consumers
2. change in borrowing by businesses
3. change in borrowing by government

Question 60

loanable funds market:

supply shifters:

Answer 60

1. change in private savings behavior
2. change in public savings
3. change in foreign investments