Ch. 11- The Monetary System

Monetary policy

small scale, fine tuning because it can be done frequently and takes effect frequently; can stop a recession as soon as it starts. Changes amount of money in circulation (Fed. Reserve)!

credit supply curve

the schedule that reports the relationship between the quantity of credit supplied and the real interest rate (upward sloping).

Which of the following are included in bank reserves for private​ banks?

vault cash, deposits at the central bank.

Suppose that velocity is 3 and the money supply is $500 million. According to the quantity theory of money, nominal output equals:

$1.5 billion. Quantity Theory of Money: M x V = P x Q ($500 mil)(3) = P x Q P x Q = $1.5 billion

How many Federal Reserve districts are there?

12

What is liquidity​?

Funds that are available for immediate payment.

Fiat money_______

Has no intrinsic value

Which of these predictions can be made using the growth rates associated with the quantity theory of money equation?

If the money supply grows at a faster rate than real GDP, there will be inflation

Which of these statements about interest rates and inflation is true?

If there is zero inflation, the nominal interest rate is equal to the real interest rate.

What are the three functions that money serves in an economy?

Medium of exchange, store of value and unit of account

When we say that money serves as a unit of account, we mean that

Prices of goods and services are quoted in terms of money.

What is the significance of the real wage as it relates to​ inflation?

Since an increase in inflation reduces the real wage that firms must​ pay, firms are more willing to hire​ workers, thus stimulating economic activity.

Which of these facts is true about the creation of the Federal Reserve System (the Fed)?

The Fed was created in 1913.

Velocity is defined as:

V = (P x Q) / M

nominal interest rate

annual growth rate of what you owe on a loan-- principal plus interest-- in nominal dollars.

Banks usually meet their liquidity needs by​ ____________.

borrowing from each other in the federal funds market.

To increase the money supply, the FOMC directs the trading desk located at the Federal Reserve Bank of New York to:

buy U.S. Treasury securities from the public.

financial intermediaries

channel funds from suppliers of financial capital, like savers, to users of financial capital, like borrowers.

debtors

economic agents who borrow funds, including entrepreneurs, home buyers, and medical students.

demand deposits

funds "loaned to the bank by depositors.

securities

i.e. stocks and bonds

According to the quantity theory of​ money, ____________.

in the long​ run, the growth in the money supply is directly related to the inflation rate.

bank reserves

include vault cash and holdings of reserves at the Federal Reserve Bank.

The functions of a central bank are to​ ____________. ​

indirectly control the money supply, monitor financial institutions, control certain key interest rates.

Credit cards are:

not part of the money supply.

credit demand curve

schedule that reports the relationship between the quantity of credit demanded and the real interest rate.

interest rate

the additional payment-- above and beyond the repayment of principal (amount of borrowed money)-- that a borrower needs to make on a $1 loan (at the end of 1 year).

stockholders' equity

the difference between the bank's total assets and its total liabilities.

credit

the funds debtors borrow.

According to the quantity theory of money, the growth rate of money supply equals

the growth rate of nominal GDP *Does not hold exactly every year, but rather it is an approximation of how the economy behaves in the long run.

When the interest rate decreases, __________.

there is movement down a stationary money demand curve