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Macro-Econ Ch 16
Terms in this set (56)
medium of exchange
an item buyers give to sellers when they want to purchase goods and services
unit of account
the yardstick people use to post prices and record debts
store of value
an item people can use to transfer purchasing power from the present to the future
medium of exchange
money is a ____________?
double coincidence of wants
the unlikely occurrence that two people each have a good/ service that the other wants
takes form of commodity with intrinsic value
ex: gold coins, cigarettes in POW camps
money without intrinsic value, used as money because of government decree
ex: the U.S. dollar
the set of assets in an economy that people use to buy goods/services from others
the ease with which an asset can be converted into the economies medium of exchange
money supply/ money stock
quantity of money available in the economy
paper bills and coins in the hands of the (nonbank) public
balances in bank accounts that depositors can access on demand by writing a check
currency, demand deposits, travelers checks, and other checkable deposits
everyday in M1 plus savings deposits, small time deposits, money market mutual funds, and a few minor categories
institution that oversees the banking system and regulated the money supply
the setting of the money supply by policy makers in the central bank
Federal Reserve (Fed)
the central bank of the U.S.
federal reserves monetary policy
________________________ can have a huge effect on variables like inflation, interest rates, unemployment, and even stock price indexes and exchange rates
fractional reserve banking system
banks keep a fraction of deposits as reserves and use the rest to make loans
established by the Fed; regulations on the minimum amount of reserves that banks must hold against deposits
banks can hold more than the minimum amount
reserve ratio (R)
fraction of deposits the banks hold as reserves; total reserves as a percentage of total deposits
deposits are considered a ______________
loans and reserves are considered ___________
R= demand deposits - loans
How to calculate reserves?
the amount of money the banking system generates with each dollar of reserves
money multiplier = _____?
open market operations (OMOs)
the purchase and sell of U.S. government bonds by the Fed
reserve requirements (RR)
affect how much money banks can create by making loans
reduce reserve requirements
To increase the money supply the Fed ____________?
raises reserve requirements
To decrease the money supply the Fed __________?
the interest rate on loans the Fed makes to banks
lower discounts rates; borrow more
to increase the money supply the Fed can ________________ encouraging banks to _______________
raise discount rates; borrow less
to decrease the money supply the Fed can ________________ encouraging banks to _____________
federal funds rate
interest rate on federal loans
the resources a bank obtains by issuing equity to its owners
bank assets - bank liabilities
how to calculate bank capital?
the use of borrowed funds to supplement existing funds for investment purposes
assets / bank capital
a government regulation that specifies a minimum amount of capital, intended to ensure banks will be able to pay off depositors and debts
money multiplier x bank reserves
how to calculate money supply?
bank reserves; money multiplier
the fed can change the money supply by changing ____________ or changing _____________
Which of the following is a store of value?
b: U.S. government bonds
c: fine art
d: All of the above are correct
The Federal Reserve
a: is a central bank; it is responsible for conducting the nation's monetary policy; and it plays a role in regulating banks.
b: is a central bank; it is responsible for conducing the nation's monetary policy; but it plays no role in regulating banks.
c: is not a central bank; it is responsible for conducing the nation's monetary policy; and it plays a role in regulating banks.
d: is a central bank; it plays a role in regulating banks; but it is not responsible for conducting the nation's monetary policy.
Suppose a bank's reserve ratio is 5 percent and the bank has $1,000 in deposits. Its reserves amount to
In 1991, the Federal Reserve lowered the reserve requirement ratio from 12 percent to 10 percent.
Other things the same this should have
a: increased both the money multiplier and the money supply. b: decreased both the money multiplier and the money supply. c: increased the money multiplier and decreased the money supply.
d: decreased the money multiplier and increased the money supply.
The Fed can increase the money supply by conducting open-market
a. sales or by raising the discount rate.
b. sales or by lowering the discount rate.
c. purchases or by raising the discount rate.
d. purchases or by lowering the discount rate.
If the public decides to hold more currency and fewer deposits in banks, bank reserves
a. decrease and the money supply eventually decreases.
b. decrease but the money supply does not change.
c. increase and the money supply eventually increases.
d. increase but the money supply does not change
In a fractional-reserve banking system, a decrease in reserve requirements
a. increases both the money multiplier and the money supply.
b. decreases both the money multiplier and the money supply.
c. increases the money multiplier, but decreases the money supply.
d. decreases the money multiplier, but increases the money supply
In the nation of Feutschland, the money supply is $80,000 and reserves are $18,000. Assuming that people hold only deposits and no currency, and that banks hold no excess reserves, then the reserve requirement is
a. 29 percent.
b. 22.5 percent.
c. 16 percent.
d. None of the above is correct.
In Hugoland, the money supply is $8 million and reserves are $1 million. Assuming that people hold only deposits and no currency, and that banks hold no excess reserves, then the reserve requirement is
a: 14 percent
b: 12.5 percent
c: 8 percent
d: none of the above is correct
If the reserve ratio is 12.5 percent, then $5,600 of money can be generated by
a: $64 of new reserves.
b: $448 of new reserves.
c: $700 of new reserves.
d: $800 of new reserves
A bank's assets equal its liabilities under
a: both 100-percent-reserve banking and fractional-reserve banking.
b: neither 100-percent-reserve banking nor fractional-reserve banking.
c: 100-percent-reserve banking but not under fractional-reserve banking.
d: fractional-reserve banking but not under 100-percent-reserve banking.
Imagine that the federal funds rate was above the level the Federal Reserve had targeted. To move the rate back towards it's target the Federal Reserve could
a. buy bonds. This buying would increase the money supply.
b. buy bonds. This buying would reduce the money supply.
c. sell bonds. This selling would increase the money supply..
d. sell bonds. This selling would reduce the money supply..
If people decide to hold less currency relative to deposits, the money supply
a: falls. The Fed could lessen the impact of this by buying Treasury bonds.
b: falls. The Fed could lessen the impact of this by selling Treasury bonds.
c: rises. The Fed could lessen the impact of this by buying Treasury bonds.
d: rises. The Fed could lessen the impact of this by selling Treasury bonds.
Suppose banks decide to hold more excess reserves relative to deposits. Other things the same,action will cause the
a: money supply to fall. To reduce the impact of this the Fed could sell Treasury bonds. b: money supply to fall. To reduce the impact of this the Fed could buy Treasury bonds. c: money supply to rise. To reduce the impact of this the Fed could sell Treasury bonds. d: money supply to rise. To reduce the impact of this the Fed could buy Treasury bonds.
The monetary policy of Salidiva is determined by the Salidivian Central Bank. The local currency is the salido. Salidivian banks collectively hold 100 million salidos of required reserves, 25 million salidos of excess reserves, 250 million salidos of Salidivian Treasury Bonds, and their customers hold 1,000 million salidos of deposits. Salidivians prefer to use only demand deposits and so the money supply consists of demand deposits.
15. Refer to Scenario 16-1. Suppose the Central Bank of Salidiva loaned the banks of Salidiva 5 million salidos. Suppose also that both the reserve requirement and the percentage of deposits held as excess reserves stay the same. By how much would the money supply of Salidiva change?
a: 60 million salidos
b:50 million salidos
c: 40 million salidos
d: None of the above is correct.
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