Money
Luigi is willing to lend Klaus $5,000 for one year at a nominal rate of interest of 7%. Both Luigi and Klause expect the rate of inflation to be 2% in the next year. How much additional purchasing power will Luigi have in one year?
$250
If the face value of a bond is $10,000,000, the coupon rate is 7%, and the inflation rate is 4%, then the annual coupon payment made to the holder of the bond is
$700,000.
In the graph, Dt is the transactions demand for money, Dm is the total demand for money, and Sm is the supply of money. The market is initially in equilibrium at a 6% rate of interest. If the supply of money increases as shown, then the asset demand for money will increase by
$75.
The Federal Board of Governors
-Investigates the health of the economy -Oversees research into domestic and international financial conditions -Investigates the effect of banking laws
Money
-Is used as a unit of account -Is used as a store of a value -Serves as a medium of exchange
Duties of the Federal Reserve
-Providing a system of check collection and clearing for depository institutions -Regulating the money supply
The Federal Reserve operates independently within the government because
-The Federal Open Market Committee meets behind closed doors -Once a Fed governor is confirmed by the Senate, a President cannot decide to remove the governor from his or her position
Examples of M2 assets would be
-Time Deposits -A savings account
If the monetary multiplier is 6, then the reserve requirement must be
0.167
Suppose the nominal annual interest rate on a 2-year loan is 8% and lenders expect inflation to be 5% in each of the two years. The annual real rate of interest is
3% (1-.05) - (1-.08)
A bond that is currently selling at $1,000 offers to pay $50 annually. What is the percentage rate of return on the bond?
5% (50/1000)
One year before maturity the price of a bond with a principal amount of $1,000 and a coupon rate of 5% paid annually fell to $981. The one year interest rate must be
7%
Suppose that lenders want to receive a real rate of interest of 5%, and that they expect inflation to remain steady at 2% in the coming years. Based on this, lenders should charge a nominal interest rate of
7%
What is one significant consequence of fractional reserve banking?
Banks are vulnerable to "panics" or "bank runs."
The reserve requirement is determined by the
Board of Governors
Reserves to lend out
Deposit - Reserves required to be held
Why are deposits considered liabilities for a bank?
Deposits can be withdrawn at any time.
The interest rate at which banks can borrow money directly from the Federal Reserve.
Discount rate
Open market operations are determined by the
Federal Open Market Committee
The part of the Federal Reserve that determines and implements the nation's monetary policy and controls the money supply to promote stable prices and economic growth is the
Federal Open Market Committee
Finding the Yield
Interest divided by cost of bond
Luigi is willing to lend Klaus $5,000 for one year at a nominal rate of interest of 7%. Both Luigi and Klause expect the rate of inflation to be 2% in the next year. If the actual rate of inflation over the year was 1%, we can say_____.
Luigi is better off and Klaus is worse off
Which definition(s) of the money supply include(s) only items that are directly and immediately usable as a medium of exchange?
M1
Change in Money Supply
Money Multiplier x Change in Bank Reserves
The most important among the Federal Reserve district banks in conducting monetary policy is the
New York bank.
The Federal Reserve's purchase or sale of government securities to change the money supply.
Open market operations
To make sure banks meet the daily needs of customers, the Federal Reserve enforces a
Reserve Requirement
The fraction of checkable deposits that banks must keep on hand, either as currency or on deposit with the Federal Reserve.
Reserve requirement
Bonds are
Risky and have little potential for gain
Reserves required to be held
Take Deposit and divide by the Money Multiplier (1/RR)
Which part of the Federal Reserve System holds reserves of the member banks?
The 12 Federal Reserve Banks
The money supply in the economy is mostly determined by
The central bank
If you use $1,000 to purchase silver coins, which you plan to keep in a safe, you are using money as
a medium of exchange.
When a baker exchanges a pie for dollars, this is an example of dollars serving as
a medium of exchange.
The Federal Reserve System regulates the money supply primarily by
altering the reserves of commercial banks, largely through sales and purchases of government bonds.
The price of bonds and bond yields are related such that:
an increase in the price of bonds will decrease the yield and a decrease in the price of bonds will increase the yield
A bank's net worth is equal to its
assets minus its liabilities.
The Federal Reserve System performs many functions but its most important one is
controlling the money supply.
A bond with no expiration has an original price of $10,000 and a fixed annual interest payment of $1,000. If the price of this bond increases by $2,500, the interest rate in effect will
decrease by 2 percentage points.
One hundred percent reserve banking refers to a situation in which banks' reserves equal One hundred percent of their
deposits
A bond has no expiration date: bond price = $1,000; bond fixed annual interest payment = $100; bond annual interest rate = 10%. If the price of this bond increases to $1,250, the interest rate will
fall to 8%.
If, in the market for money, the amount of money supplied exceeds the amount of money households and businesses want to hold, the interest rate will
fall, causing households and businesses to hold more money.
A decrease in the interest rate will_____.
have no effect on the quantity of money supplied in the economy
It is costly to hold money because
in doing so, one sacrifices interest income.
Assume that the required reserve ratio is 20%. A business deposits a $50,000 check at Bank A; the check is drawn against Bank B. What happens to the reserves at Bank A and Bank B?
increase by $50,000 at Bank A and decrease by $50,000 at Bank B
A commercial bank has no excess reserves until a depositor places $5,000 in cash at the bank. The commercial bank then lends $4,000 to a borrower. As a consequence of these transactions, the size of the money supply has
increased by $4,000.
The supply of money is
independent of the price (the interest rate)
The money supply curve is_____.
inelastic with respect to the interest rate
The coupon rate is the
interest rate promised when a bond is issued.
An increase in the money supply is likely to reduce
interest rates.
The Board of Governors is the part of the Federal Reserve System that
is located in Washington, D.C. and consists of 7 governors who serve 14-year terms
A bank has $2 million in checkable deposits. In the bank's balance sheet, this would be part of
liabilities.
The Federal Reserve Banks are owned by the
member banks.
Congress and Parliament is responsible for
overseeing the monetary system for a nation.
The interest rate will fall when the
quantity of money supplied exceeds the quantity of money demanded.
The real interest rate is
the amount earned to compensate people for postponing consumption.
An increase in the supply of money causes
the interest rate to fall
Currency and checkable deposits are
the major components of money supply M1.
As people desire to hold less money as an asset
the money demand curve will decrease, causing a surplus of money, which makes interest rates in the money market fall
Which of the following varies directly with the interest rate?
the opportunity cost of holding money
If the interest rate increases or decreases,
the supply of money will remain unchanged
Because travelers checks are Immediately convertible,
they are highly liquid and go into M1
The FED
tracks the money supply
On the island of Yap, 5 canoes have a value of one stone wheel known as a fei. What function of money do fei serve in this example?
unit of account
