26 terms

Chapter 12

Money is
whatever is generally accepted in exchange for goods and services.
Commercial banks can borrow reserves directly from the Fed at the
discount rate
Demand deposits are
deposits of individuals that can either be withdrawn or made payable on demand to a third party by a check
If you have a checking account at a local bank, your bank account there is
liability of the bank and an asset to you
The main purpose of the Fed is to
maintain the proper functioning of our money system
Are "smart cards" or E-cash cards part of the money supply?
No, because they are merely means to transfer checking deposits.
In the United States, the money supply (M1) consists of
coins, paper currency, demand deposits, other checkable deposits, and traveler's checks.
Excess reserves are
actual reserves held by banks that exceed the legal requirement.
The fraction that banks must, by law, hold as reserves against the checking deposits of their customers is called the
required reserve ratio.
A bank finds itself short of required reserves and therefore borrows from another commercial bank. The interest rate on this loan is
the federal funds rate
Which of the following is the best definition of money?
anything generally accepted as a payment for goods or repayment of debt
Which one of the following is the largest component of the money supply (M1) in the United States?
demand and other checking deposits
The funds that banks are required by law to hold in the form of either vault cash or deposits with the Fed are called
required reserves
Fiat money is money
that has little intrinsic value and is not backed by a commodity
If the Fed buys a T-bill from a commercial bank, how will it pay for the T-bill?
It will give the bank new reserves.
If a customer deposits $1,000 cash into her checking account, the bank's
assets and liabilities both rise by $1,000.
Best National Bank is subject to a 10 percent required-reserve ratio. If this bank received a new checkable deposit of $1,000, it could make new loans of
In order to increase the money supply, the banking system must have
excess reserves.
You withdraw $100 from your checking account. How does this affect the money supply and the reserves of your bank?
There is no change in the money supply, and the reserves of your bank decline
When a banker accepts a deposit of $1,000 in cash and puts $200 aside as required reserves and then makes a loan of $800 to a new borrower, this set of transactions
increases the money supply by $800
The main source of profit for financial institutions is
the difference between interest paid on deposits and interest received on loans.
When the Federal Reserve System wants to increase the money supply, what does it typically do?
It purchases U.S. government securities
If the prices of goods and services fall, the value of money (its purchasing power)
Open market operations is the
tool most often used by the Fed to alter the money supply.
If the banking system has $5 million in excess reserves, and the required reserve ratio is 25 percent, what is the maximum amount by which the money supply can be increased?
$20 million
An individual bank can lend out at most its
excess reserves.