macro ch.14(money,banks,and federal reserve system)

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Suppose that you deposit $2,000 in your bank and the required reserve ratio is 10 percent. The maximum loan your bank can made as a direct result of your deposit is

$1,800

open market operations

The buying and selling of Treasury Securities by the Federal Reserve in order to control the money supply

discount rate

The interest rate on the loans that the Fed makes to banks

required reserve ratio (RR)

The minimum fraction of deposits banks are required by law to keep as reserves

quantity theory of money

a theory about the connection between money and prices that assumes that the velocity of money is constant

commodity money

goods used as money that also have value independent of their use as money

bank panic

if many banks simultaneously experience bank runs

The three main monetary policy tools used by the Federal Reserve to manage the money supply are

open market operations, discount policy, and reserve requirements

fiat money

refers to any money, such as paper currency, that is authorized by a central bank or governmental body, and that does not have to be exchanged by the central bank for gold or some other commodity money.

excess reserves

reserves over the legal requirement

required reserves

reserves that a bank is legally required to hold, based on its checking account deposits

Federal Open Market Committee (FOMC)

responsible for open market operations and managing the money supply

fractional reserve banking system

a system shared by nearly all countries

Suppose you withdraw $500 from your checking account deposit and bury it in a jar in your back yard. If the required reserve ratio is 10 percent, checking account deposits in the banking system as a whole could drop up to a maximum of

$5,000.

Suppose a bank has $100,000 in checking account deposits with no excess reserves and the required reserve ratio is 10 percent. If the Federal Reserve raises the required reserve ratio to 12 percent, then the bank will now have excess reserves of

-$2,000.

According to the quantity theory of money, if the money supply grows at 6%, real GDP grows at 2%, and the velocity of money is constant, then the inflation rate will be

4%

security

A financial asset—such as a stock or a bond—that can be bought and sold in a financial market.

Which of the following is not a consequence of hyperinflation?

Money's function as a medium of exchange is enhanced

M2

a broader definition of the money supply: it includes M1 plus savings account deposits, small-denomination time deposits, balances in money market deposit accounts in banks, and non institutional money market fund shares

money

any asset that people are generally willing to accept in exchange for goods and services or for payment of debts

asset

anything of value owned by a person or a firm

The primary tool the Federal Reserve uses to increase the money supply is

buying Treasury securities.

bank run

depositors lost confidence in a bank, and tried to withdraw their money all at once

A fractional reserve banking system is one in which banks hold less than 100 percent of ________ as reserves.

deposits

A bank's largest liability is its

deposits of its customers.

Reserves

deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve

discount loans

loans the federal reserve makes to banks

Money's most narrow definition is based on its function as a

medium of exchange.

The ________ the reserve ratio, the ________ the money multiplier.

smaller; larger

The statement "This Dell laptop costs $1,200" illustrates which function of money?

unit of account

velocity of money

the average number of times each dollar in the money supply is used to purchase goods and services included in GDP

M1

the narrowest definition of the money supply: the sum of currency in circulation, checking account deposits in banks, and holdings of traveler's checks

Securization

the process of transforming loans or other financial assets into securities

simple deposit multiplier

the ratio of the amount of deposits created by banks to the amount of new reserves

The more excess reserves banks choose to keep,

the smaller the deposit multiplier


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