Chapter 17 Econ Review

What is the current required reserve ratio? What would happen to the money supply if the fed decreased the ratio?

10% (.10) It would increase the money multiplier which would increase money supply.

Suppose you withdraw $100 from your checking account. What impact would this action alone have on the following? (A) The money supply (B) Your bank's required reserves (C) Your bank's excess reserves

A. -$100; decreases money supply B. Required reserves would decrease C. Excess reserves would increase

Why is the actual money multiplier usually less than the simple money multiplier?

Because all currency is not deposited and banks do hold excess reserves. The simple money multiplier is a representation of the maximum size of the money multiplier.

Why can't a bank lend out all of its reserves?

Because their legally bound to hold a fraction of their deposits on reserve (required reserves) and have to be able to accommodate withdrawals of their depositors.

How does the Fed increase and decrease the money supply through open market operations?

By purchasing (increase money supply) or selling (decrease money supply) US Treasury securities

What is the difference between commodity money and fiat money?

Commodity money involves the use of an actual good in place of money (gold coin, tobacco). Fiat money has no other value than as a medium for exchange; value comes from government (paper money).

How is the discount rate different from the federal funds rate?

Discount rate is the interest rate on discount loans made by the Fed to private banks. Federal funds rate is the interest rate on loans between private banks.

What are the components of M1 and M2? List them.

M1 is the money supply measure composed of currency and checkable deposits. M2 is the money supply measure that includes M1 + savings deposits, money market mutual funds, and small-demonination time deposits (CDs).

Define quantitative easing. How is it different from standard open market operations?

It is a form of open market operations that focuses on targeted securities purchases in both troubled markets and long-term Treasury securities instead of short-term.

What are the three functions of money? Which function is the defining characteristic?

The three functions are as a Medium for exchange, a Unit of account (measure in which prices are quoted; universal language for value in trade), Store value (means for holding wealth i.e. Gold coins; function has declined today due to bank accounts)