Chapter 9

M2 is defined as a measure of the money supply that includes, mainly:

M1 plus savings accounts

When the Fed sells U. S. government securities in the open market:

Bank deposits decrease and the money supply expands.

For something to be called money it must:

Be accepted in exchange for all other goods and services.

The store of value function is defined as:

Delaying the use of money earned until a later date.

The interest rate charged by the Fed when a bank borrows reserves from the Fed is called the:

Discount rate.

The three policy tools that the Fed can use to carry out monetary policy are setting the:

Discount rate; open market operations; and setting the required reserve ratio.

The most important body of the Federal Reserve System to carry out monetary policy is the:

Federal Open Market Committee.

The required reserve ratio is 10 percent. You deposit $1000 in your checking account. The bank must immediately:

Increase required reserves by $100.

If the required reserve ratio is increased from 10 percent to 12 percent and there is a $10,000 new deposit, the maximum increase in the money supply will be:

More than $10,000 but less than $100,000.

When the Fed conducts open market operations, it is buying or selling:

Previously issued government securities that circulate in publicly traded bond markets.

When you read the price tag on an article of clothing, money is functioning as a:

Standard of value.

The size of the money supply in the United States is controlled by:

The Federal Reserve System.

The money supply is defined as:

The amount of money that people can access.

As it pertains to money, liquidity can be defined as:

The ease with which an asset can be spent.

A new deposit triggers the ability of a bank to make a loan, which will generate a series of more, but ever smaller, loans. This is the basis of:

The money multiplier process.

The reason the money multiplier exists is that:

When a borrower spends the money, it becomes someone else's deposit.