chapter 21 assignment #9

Open-Market Operation

- The primary way in which the Fed changes the money supply -The Fed purchases and sells U.S. government bonds

Currency

Currency is the paper bills and coins in the hands of the public.

Open Market Sale

To decrease the money supply, the Fed sells government bonds to the public

Fractional reserve banking

a banking system in which banks hold only a fraction of deposits as reserves

Prisoners sometimes determine a single good, such as a pack of cigarettes, to be used as money. This good becomes a. a medium of exchange and a unit of account. b. a medium of exchange, but not a unit of account. c. a unit of account, but not a medium of exchange. d. neither a unit of account nor a medium of exchange.

a medium of exchange and a unit of account

medium of exchange

an item that buyers give to sellers when they want to purchase goods and services. - anything that is readily acceptable as payment.

store of value

an item that people can use to transfer purchasing power from the present to the future.

Demand deposits

balances in bank accounts that depositors can access on demand by writing a check

In a system of 100-percent-reserve banking, a. banks do not accept deposits. b. banks do not influence the supply of money. c. loans are the only asset item for banks. d. All of the above are correct.

banks do not influence the supply of money

When the Fed decreases the discount rate, banks will a. borrow more from the Fed and lend more to the public. The money supply increases. b. borrow more from the Fed and lend less to the public. The money supply decreases. c. borrow less from the Fed and lend more to the public. The money supply increases. d. borrow less from the Fed and lend less to the public. The money supply decreases.

borrow more from the Fed and lend more to the public. The money supply increases.

The primary difference between commodity money and fiat money is that a. commodity money is a medium of exchange but fiat money is not. b. fiat money is a medium of exchange but commodity money is not. c. commodity money has intrinsic value but fiat money does not. d. fiat money has intrinsic value but commodity money does not. primary difference between commodity money and fiat money is that

commodity money has intrinsic value but fiat money does not.

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.

decrease and the money supply eventually decreases.

Reserves

deposits that banks have received but have not loaned out.

central bank

designed to oversee the banking system. regulates the quantity of money in the economy.

The Soviet government in the 1980's never abandoned the ruble as the official currency. However, the people of Moscow preferred to accept a. cigarettes in exchange for goods and services, because they were convinced that cigarettes were going to soon become hard to come by. b. American dollars in exchange for goods and services, because rubles were extremely hard to come by. c. goods such as cigarettes or American dollars in exchange for goods and services, reminding us of the fact that government decree by itself is not sufficient for the success of a commodity money. d. All of the above are correct.

goods such as cigarettes or American dollars in exchange for goods and services, reminding us of the fact that government decree by itself is not sufficient for the success of a commodity money.

Commodity money

has intrinsic value. Means that the item would have value even if it were not used as money - Examples: Gold, silver, cigarettes

At one time, people in a certain country had no access to banks; they relied exclusively on currency. Then a fractional-reserve banking system was created. As a result, the money supply a. increased. The central bank could have reduced the size of this increase by buying bonds. b. increased. The central bank could have reduced the size of this increase by selling bonds. c. decreased. The central bank could have reduced the size of this decrease by buying bonds. d. decreased. The central bank could have reduced the size of this decrease by selling bonds.

increased. The central bank could have reduced the size of this increase by selling bonds.

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.

increases both the money multiplier and the money supply.

An open-market purchase a. increases the number of dollars and the number of bonds in the hands of the public. b. increases the number of dollars in the hands of the public and decreases the number of bonds in the hands of the public. c. decreases the number of dollars and the number of bonds in the hands of the public. d. decreases the number of dollars in the hands of the public and increases the number of bonds in the hands of the public.

increases the number of dollars in the hands of the public and decreases the number of bonds in the hands of the public

When there is a reserve requirement, banks a. must hold exactly the required quantity of reserves. b. may hold more than, but not less than, the required quantity of reserves. c. may hold less than, but not more than, the required quantity of reserves. d. must seek the Fed's permission whenever they wish to expand or contract their loans to customers.

may hold more than, but not less than, the required quantity of reserves

Reserve requirements

regulations on the minimum amount of reserves that banks must hold against deposits -the amount (%) of a bank's total reserves that may not be loaned out. • Increasing the reserve requirement decreases the money supply. • Decreasing the reserve requirement increases the money supply.

The fed can decrease 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.

sales or by raising the discount rate

When conducting an open-market sale, the Fed a. buys government bonds, and in so doing increases the money supply. b. buys government bonds, and in so doing decreases the money supply. c. sells government bonds, and in so doing increases the money supply. d. sells government bonds, and in so doing decreases the money supply.

sells government bonds, and in so doing decreases the money supply

Money

set of assets in an economy that people regularly use to buy goods and services from other people

A problem that the Fed faces when it attempts to control the money supply is that a. since the U.S. has a fractional-reserve banking system, the amount of money in the economy depends in part on the behavior of depositors and bankers. b. the Fed has to get the approval of the U.S. Treasury Department whenever it uses any of its monetary policy tools. c. while the Fed has the ability to change the money supply by a large amount, it does not have the ability to change it by a small amount. d. federal legislation in the 1950s stripped the Fed of its power to act as a lender of last resort to banks.

since the U.S. has a fractional-reserve banking system, the amount of money in the economy depends in part on the behavior of depositors and bankers.

Dollar bills, rare paintings, and emerald necklaces are all a. media of exchange. b. units of account. c. stores of value. d. All of the above are correct.

stores of value

money multiplier

the amount of money the banking system generates with each dollar of reserves. -the reciprocal of the reserve ratio

Federal Reserve (Fed)

the central bank of the united states. - Regulates banks to ensure they follow federal laws intended to promote safe and sound banking practices. - Acts as a banker's bank, making loans to banks and as a lender of last resort. - Conducts monetary policy by controlling the money supply.

Liquidity

the ease with which an asset can be converted into the economy's medium of exchange.

reserve ratio

the fraction of deposits that banks hold as reserves

Federal funds rate

the interest rate at which banks make overnight loans to one another

discount rate

the interest rate the Fed charges banks for loans. • Increasing the discount rate decreases the money supply. • Decreasing the discount rate increases the money supply.

When the Fed buys government bonds, a. the money supply increases and the federal funds rate increases. b. the money supply increases and the federal funds rate decreases. c. the money supply decreases and the federal funds rate increases. d. the money supply decreases and the federal funds rate decreases.

the money supply increases and the federal funds rate decreases

money supply

the quantity of money available in the economy

monetary supply

the setting of the money supply by policymakers in the central bank -conducted by FOMC

Imagine an economy in which: (1) pieces of paper called yollars are the only thing that buyers give to sellers when they buy goods and services, so it would be common to use, say, 50 yollars to buy a pair of shoes; (2) prices are posted in terms of yardsticks, so you might walk into a grocery store and see that, today, an apple is worth 2 yardsticks; and (3) yardsticks disintegrate overnight, so no yardstick has any value for more than 24 hours. In this economy, a. the yardstick is a medium of exchange but it cannot serve as a unit of account. b. the yardstick is a unit of account but it cannot serve as a store of value. c. the yardstick is a medium of exchange but it cannot serve as a store of value, and the yollar is a unit of account. d. the yollar is a unit of account, but it is not a medium of exchange and it is not a liquid asset.

the yardstick is a unit of account but it cannot serve as a store of value

unit of account

the yardstick people use to post prices and record debts

Economists use the term "money" to refer to a. all wealth. b. all assets, including real assets and financial assets. c. all financial assets, but not real assets. d. those types of wealth that are regularly accepted by sellers in exchange for goods and services.

those types of wealth that are regularly accepted by sellers in exchange for goods and services.

Fiat money

used as money because of government decree. - It does not have intrinsic value. - Examples: Coins, currency, check deposits.