Principles of Macroeconomics Chapter 16- EXAM 2

What are the 3 qualifications for money?

a medium of exchange unit of account store of value

Suppose the reserve ratio is 0.2. If the Fed wants to increase the money supply by $50 million, what should it do in the bond market?

buy 10,000,000 worth of bonds

What is the Federal Reserve doing when it increases the money supply through open-market operations?

buy bonds

True or false: the US dollar has always been a fiat currency.

false

Which of the following federal reserve actions would result in an increased money supply?

reduce interest paid on reserves at the central bank

If the Fed wants to decrease the money supply by $10 million, what should it do in the bond market?

sell 1,000,000 worth of bonds

What is the money multiplier?

the amount of money the banking system generates with each dollar of reserves 1/RR

The requirement of a double coincidence of wants is a problem with

the barter system

True or false: demand deposits belong to M1 and M2.

true

How do bank runs get started?

- Bank runs is when too many customers try and withdraw money at the same time.

why are there no more bank runs in the USA

- Bank runs no longer happen anymore because the FDIC ensures that their money is safe and there is no reason to "run" to the bank and withdraw all your money at once.

What is the purpose of a capital requirement?

- Capital requirements are different from reserves and require the bank to have money to set aside that they'd lose if they went under. This curtails some of their risk taking

What would the money multiplier be if the reserve ratio is 0.25?

4

1. What would the money multiplier be if the reserve ratio is 0.2?

5

currency

Coins and paper bills used as money

How do banks create money?

Banks hold deposits into something called a reserve. Reserves are assets and deposits are liabilities. Banks create money using something called the money multiplier. For example $100 of reserves generates $1000 of money for the bank. - they make money by selling loans

Which of the following is an advantage to having a fiat currency?

The government can easily increase the money supply

How can the Federal Reserve increase the money supply with open-market operations?

To increase its money supply, the Fed instructs its bond traders to buy more from the public. By paying bonds with newly made dollars, the Fed increases the number of dollars made in the economy. to increase money supply the Fed needs to buy bonds