1. M1
2. Savings Deposits
3. Small time deposits
4. Money Market Mutual Funds
5. A few minor categories
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Federal Reserve (Fed)
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The central bank of the United States.
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central Bank
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an institution designed to oversee the banking system and regulate the quantity of money in the economy
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money Supply
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he quantity of money available in the economy
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monetary Policy
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the setting of the money supply by policymakers in the central bank
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Federal Open Market Committee (FOMC)
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meets about every six weeks in Washington D.C. to discuss the condition of the economy and consider changes in monetary policy
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Open-Market Operation
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the purchase and sale of U.S. government bonds
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reserves
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deposits that banks have received but have not loaned out
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T-Account
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a simplified accounting statement that shows changes in a bank's assets and liabilities
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fractional-reserve banking
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a banking system in which banks hold only a fraction of deposits as reserves
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reserve ratio
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the fraction of deposits that banks hold as reserves
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money multiplier
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the amount of money the banking system generates with each dollar of reserves
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bank capital
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the resources a bank's owners have put into the institution
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leverage
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the use of borrowed money to supplement existing funds for purposes of investment
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leverage ratio
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the ratio of assets to bank capital
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capital requirement
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a government regulation specifying a minimum amount of bank capital
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How does the Fed alter the quantity of reserves in the economy?
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by buying or selling bonds in open-market operations or by making loans to banks
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discount rate
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the interest rate on the loans that the Fed makes to banks
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reserve requirements
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regulations on the minimum amount of reserves that banks must hold against deposits.
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federal funds rate
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the interest rate at which banks make overnight loans to one another
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You use U.S. currency to pay the owner of a restaurant for a delicious meal. The currency:
a. has no intrinsic value. The exchange is an example of barter.
b. has no intrinsic value. The exchange is not an example of barter.
c. has intrinsic value. The exchange is not an example of barter.
d. has intrinsic value. The exchange is not an example of barter.
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B
the money paid is considered fiat money which is established by government decree
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The existence of money leads to:
a. greater specialization in production, but not to a higher standard of living.
b. a higher standard of living, but not to greater specialization.
c. greater specialization and to a higher standard of living.
d. neither greater specialization nor to a higher standard of living.
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C
constitutes purchasing power which is used for regularly bought goods and services
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Economists use the word "money" to refer to:
a. income generated by the production of goods and services.
b. those assets regularly used to buy goods and services.
c. financial assets such as stocks and bonds.
d. any type of wealth.
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B
Only includes the few types of wealth that are regularly accepted by sellers in exchange for goods and services
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The confidence you have that a retailer will accept dollars in exchange for goods is based primarily on money:
a. being a unit of account.
b. being a medium of exchange.
c. serving as a store of value.
d. having intrinsic value.
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B
Money is a medium of exchange when buyers give it to sellers when they purchase goods and services
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Liquidity refers to
a. the ease with which an asset is converted to the medium of exchange.
b. the measurement of the intrinsic value of commodity money.
c. the measurement of the durability of a good.
d. how many time a dollar circulates in a given year.
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A
Money is the economy's medium of exchange which makes it the most liquid asset available
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The primary difference between commodity money and fiat money is that
a. commodity money is a medium of exchange but fiat money is not.
b. fiat money is a medium of exchange but commodity money is not.
c. commodity money has intrinsic value but fiat money does not.
d. fiat money has intrinsic value but commodity money does not.
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C
Commodity money has intrinsic value because it would have value if it were not used as money (Fiat money does not have intrinsic value because it is government decreed)
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Which of the following is included in both M1 and M2?
a. savings deposits
b. demand deposits
c. small time deposits
d. money market mutual funds
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B
Demand deposits are easily transferred funds that depositors can access on demand by writing checks or using a debit card
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A bank which must hold 100 percent reserves opens in an economy that had no banks and a currency of $150. If customers deposit $50 into the bank what is the value of the money supply?
a. $50
b. $100
c. $150
d. $200
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C
The money supply would not change if someone deposited $50 because the bank must hold the entire deposit as a reserve
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A bank's reserve ratio is 10 percent and the bank has $5000 in deposits. Its reserves amount to
a. $50.
b. $500.
c. $4500.
d. $4950.
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B
10% of the $5000 deposit is kept as reserve and the $4500 remaining is used for loans
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As the reserve ratio decreases the money multiplier
a. increases.
b. does not change.
c. decreases.
d. could do any of the above.
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A
The money multiplier is the reciprocal of the reserve ratio
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On a bank's T-account which are part of the banks liabilities?
a. both deposits made by its customers and reserves
b. deposits made by its customers but not reserves
c. reserves but not deposits made by its customers
d. neither deposits made by its customers nor reserves
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B
The bank owes the money back to the depositors when they make a deposit but they keep the reserve. This allows them to influence the supply of money because the reserve ratios change
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When the Fed conducts open-market purchases
a. it buys Treasury securities which increases the money supply.
b. it buys Treasury securities which decreases the money supply.
c. it borrows money from member banks which increases the money supply.
d. it lends money to member banks which decreases the money supply.
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A
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Which of the following increase when the Fed makes open market purchases?
a. currency and reserves
b. currency but not reserves
c. reserves but not currency
d. neither currency nor reserves
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C
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Which tool of monetary policy does the Federal Reserve use most often?
a. term auctions
b. open-market operations
c. changes in reserve requirements
d. changes in the discount rate
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B
The Fed can use open-market operations to change the money supply by a small or large amount on any day without major changes in laws or bank regulations which is why it is used most often
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If the money multiplier is 3 and the Fed wants to increase the money supply by $900000 it could
a. buy $300000 worth of bonds.
b. buy $225000 worth of bonds.
c. sell $300000 worth of bonds.
d. sell $225000 worth of bonds.
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A
Buying 300000 worth of bonds with a 3% money multiplier will equal out to 900000 and be transferred to a bank or person. This increases the money supply.
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During a recession the economy experiences
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falling employment and income
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Most economists use the aggregate demand and aggregate supply model primary to analyze
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short-term fluctuations in the economy
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The classical dichotomy refers to the separation of
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real and nominal variables
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The saying "Money is a veil" means that
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in the long run money is of no importance to the determination of either real or nominal variables
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The aggregate demand is described graphically as
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sloping downward
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Suppose the price level in the economy increased by 5% compared to last year. As a result, households are now able to purchase less goods and services. This refers to
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wealth effect
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Suppose the economy of Nauru, an island nation in the Pacific, is his by a disastrous typhoon. The Nauruans saw their infrastructure damaged immensely. As an economist, you will conclude that the
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long-run aggregate supply shifts to the left
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The position of the long-run aggregate supply curve
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is determined by resource usage and technology associated with natural rate of unemployment
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The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected
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production is more profitable and employment rises
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Shifts in aggregate demand, in the aggregate demand-aggregate supply model, affect the price level in
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the short run but not the long run
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recession
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a period of declining real incomes and rising unemployment
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depression
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a severe recession
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3 key facts about Economic Fluctuations
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1. Economic Fluctuations are Irregular and Unpredictable
2. Most Macroeconomic Quantities Fluctuate Together
3. As Output Falls, Unemployment Rises
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model of aggregate demand and aggregate supply
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the model that most economists use to explain short-run fluctuations in economic activity around its long-run trend
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aggregate-demand curve
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a curve that shows the quantity of goods and services that households, firms, the government, and customers abroad want to buy at each price level; Y=C+I+G+NX
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aggregate-supply curve
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a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level
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The Wealth Effect
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A decrease in the price level raises the real value of money and makes consumers wealthier, which in turn encourages them to spend more. The increase in consumer spending means a larger Q of goods and services demanded. (vice versa)
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The Interest-Rate Effect
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A lower price level reduces the interest rate, encourages greater spending on investment goods, and thereby increases the Q of goods and services demanded. (vice versa)
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The Exchange-Rate Effect
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When a fall in the U.S. price level causes U.S. interest rates to fall, the real value of the dollar declines in foreign exchange markets. This depreciation stimulates U.S. net exports and thereby increases the Q of goods and services demanded. (vice versa)
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Why is the LRAS a vertical line?
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Production of goods in the long run depends on its supplies of labor, capital, and technology and the availability of natural resources.
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natural level of output
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the production of goods and services that an economy achieves in the long run when unemployment is at its normal rate
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Factors that affect LRAS?
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Shifts arising from changes in labor, capital, technology, and natural resources.
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When/why does the SRAS slope upward?
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When the actual price level in the economy deviates from the price level that people expected to prevail.
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SRAS lesson:
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An increase in the expected price level reduces the quantity of goods and services supplied and shifts the SRAS to the LEFT. (vice versa)
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