Macroeconomics Chapter 9 example #41258

22 May 2024
4.4 (224 reviews)
25 test answers

Unlock all answers in this set

Unlock answers (21)
question
Medium of Exchange
answer
An item that sellers generally accept and buyers generally use to pay for goods and services
question
Unit of Account
answer
A standard measurement unit in terms of which prices can be stated and the relative value of goods and services compared.
question
Store of Value
answer
An asset set aside to purchase items in the future.
question
M1
answer
The narrowest definition of the U.S. money supply. It consists of: Currency in the hands of the nonbank public All checkable deposits
question
M2
answer
A broader definition of money and includes M1 plus several near-monies. The categories of near-monies owned by individuals are: Saving deposits Time deposits Money market mutual funds
question
Near-Monies
answer
Certain highly liquid financial assets that do not function directly or fully as a medium of exchange but can be readily converted into currency or checkable deposits.
question
Value of Money
answer
The U.S. money supply is guaranteed by the government's ability to keep the value of money relatively stable.
question
Money Has Value Because...
answer
Its acceptability, legal tender designation, and relative scarcity.
question
Legal Tender
answer
Legal designation of a nation's official currency (bills and coins).
question
Purchasing Power of Dollar and Price Level Relationship
answer
Purchasing power of the dollar varies inversely with the price level.
question
The Purchasing Power of Money
answer
The amount of goods and services a unit of money will buy.
question
How Inflation Affects The Purchasing Power of Money
answer
When the government prints too much money, the purchasing power of money declines. Also, runaway inflation may significantly reduce the purchasing power of the dollar and may cause it to cease being used as a medium of exchange.
question
Federal Reserve System
answer
A key element of the U.S. banking system
question
The Board of Governors of the Federal Reserve
answer
A seven-member group that supervises and controls the money and banking system of the U.S.
question
The 12 Federal Reserve Banks
answer
12 banks chartered by the U.S. government to control the money supply and perform other functions. They collectively serve as the nation's "central bank" and also serve as bankers' bank. (Most nations have a single central bank.)
question
Federal Open Market Committee (FOMC)
answer
The 12 member Federal Reserve group that determines the purchase and sale policies of the Federal Reserve Banks in the market for U.S. securities in order to conduct the monetary policy.
question
The Fed performs the following functions:
answer
Issues currency Sets reserve requirements and holds reserves Lends money to banks and thrifts Provides the banking system with a means for collecting checks Acts as a fiscal agent for the Federal government Supervises the operation of banks Controls the money supply and thus indirectly sets interest rates
question
The Fed is an independent agency of the government.
answer
This protects the Fed from political pressure so that it could effectively control the money supply and interest rates to foster price-level stability.
question
Fractional Reserve Banking System
answer
One in which banks and thrifts are required to hold less than 100 percent of their checkable-deposit liabilities as cash reserves.
question
All commercial banks and thrifts that provide checkable deposits must by law keep...
answer
Required Reserves, The amount of required reserves is determined by the reserve ratio (R).
question
Required Reserves
answer
An amount of funds equal to a specified percentage of the bank's own deposit liabilities. They must be kept on deposit with the Federal Reserve Bank or held as cash in the bank's vault.
question
Reserve Ratio
answer
Commercial Bank's Required Reserves / Commercial-Deposit Liabilities
question
Excess Reserves
answer
Actual bank or thrift reserves minus legally required reserves. An individual bank can only lend an amount equal to its excess reserves, but the commercial banking system can lend by a multiple of its excess reserves.
question
Monetary Multiplier
answer
The multiple of its excess reserves by which the banking system can expand checkable deposits and thus the money supply by making new loans. m = 1/R
question
Maximum Checkable-Deposit Creation Formula
answer
Equal to total excess reserves, E, times the monetary multiplier D = E Γ— m