Chapter 18
Money today
is fiat money.
A commercial bank is defined as
a firm that is chartered to accept deposits and make loans.
The unit of account is defined as
an agreed upon measure for stating prices of goods and services.
As the central bank, the Federal Reserve System provides banking services to
banks and regulates financial institutions and markets.
Because the Federal Reserve System is a central bank, it provides banking services to
commercial banks.
An official measure of money in the United States is M1, which includes the sum of
currency plus checkable deposits.
Actual reserves are equal to
desired reserves plus excess reserves.
Banks can make loans as long as they have
excess reserves.
Money is any commodity or token that is
generally accepted as a means of payment.
Which of the following is a tool the Fed uses to adjust the quantity of money? i. The Fed can change the interest rate on loans to bank customers. ii. The Fed can change the discount rate on loans to banks. iii. The Fed can buy or sell government securities.
ii and iii
Money performs all of the following functions EXCEPT serving as a i. medium of exchange. ii. unit of account. iii. barter mechanism.
iii only
The discount rate is the
interest rate at which the Fed will loan reserves to commercial banks.
Banks create money by
making loans and creating deposits, a process that is limited by the size of banks' excess reserves.
Banks create money by
making loans.
Money serves as a
medium of exchange, unit of account, and store of value.
Open market operations are the
purchase or sale of government securities by the Fed.
Fiat money means
the government has decreed that something is money.
If you shop for a car online and compare car prices across dealerships, money is functioning as a
unit of account.
Suppose the desired reserve ratio is 10 percent. If Urban Bank has total deposits of $1000 and total assets of $10,000, the amount of desired reserves is
$100.
The Commerce Bank of Beverly Hills has total deposits of $1,000,000 and total reserves of $220,000. The desired reserve ratio is 10 percent. The bank's excess reserves are
$120,000.
A bank has deposits of $400, reserves of $50, and the desired reserve ratio is 7 percent. The bank's excess reserves are
$22.
A bank has checkable deposits of $1,000,000, loans of $600,000, and government securities of $400,000. If the required reserve ratio is 5 percent, the amount of required reserves is
$50,000.
A bank has $250 in checking deposits, $1,000 in savings deposits, $1,200 in time deposits, $1,000 in loans to businesses, $400 in outstanding credit card balances, $800 in government securities, $25 in currency in its vault, and $25 in deposits at the Fed.The bank's reserves are equal to
$50.
A new bank has reserves of $600,000, checkable deposits of $500,000, and government securities of $100,000. If the desired reserve ratio is 10 percent, the amount of loans this bank can make is
$550,000.
If the desired reserve ratio is 7 percent and a bank has $10,000 of deposits, then its desired reserves are
$700.