question
3 Functions of Money
answer
1. A Medium of Exchange- Money can easily be used
to buy goods and services. Don't have to barter
2. A Unit of Account- Money measures the value of goods and services and measures value
3. A Store of Value-Money allows you to store purchasing power for the future
to buy goods and services. Don't have to barter
2. A Unit of Account- Money measures the value of goods and services and measures value
3. A Store of Value-Money allows you to store purchasing power for the future
question
Transaction Demand for Money
answer
People demand money to make everyday purchases.
This is not affected by the interest rate
This is not affected by the interest rate
question
Asset Demand for money
answer
When people demand money as a liquid asset because
they prefer it to other non-liquid assets like bonds
they prefer it to other non-liquid assets like bonds
question
Relationship between IR and money demanded
answer
Interest rate ↑, the quantity of money demanded __↓__
Interest rate ↓, the quantity of money demanded __↑__
Interest rate ↓, the quantity of money demanded __↑__
question
3 shifters of money demand
answer
1. Changes in price level- Inflation requires consumer
to hold more cash for financial transactions.
2. Changes income- Sustained economic growth in the
economy leads to a increase in the demand for money
3. Changes in taxation that affects personal investment- Government policies such as changing the capital gains tax would change the demand for money
to hold more cash for financial transactions.
2. Changes income- Sustained economic growth in the
economy leads to a increase in the demand for money
3. Changes in taxation that affects personal investment- Government policies such as changing the capital gains tax would change the demand for money
question
3 shifters of money supply
answer
Reserve ratio-the the percent of deposits that banks must hold in reserve (the % they can NOT loan out)
*To increase money supply, decrease the reserve ratio
*To decrease money supply, increase the reserve ratio
2. Discount Rate- the interest rate that the FED
charges commercial banks
*To increase money supply, decrease the discount rate
*To decrease money supply, increase the discount rate
3. Open Market Operations- when the FED buys or sells government bonds (securities)
*To increase money supply, the FED buys bonds
*To decrease money supply, the FED sells bonds
*To increase money supply, decrease the reserve ratio
*To decrease money supply, increase the reserve ratio
2. Discount Rate- the interest rate that the FED
charges commercial banks
*To increase money supply, decrease the discount rate
*To decrease money supply, increase the discount rate
3. Open Market Operations- when the FED buys or sells government bonds (securities)
*To increase money supply, the FED buys bonds
*To decrease money supply, the FED sells bonds
question
Unexpected inflation causes the demand for money to ____ and the IR to ___
answer
both will increase
question
If the MS increased the IR will ___1_ and investment will __2__
answer
1.decrease
2.Increase
2.Increase
question
T or F
When the interest rate is high, the opportunity cost of holding money increases so the quantity of money demanded will decrease.
When the interest rate is high, the opportunity cost of holding money increases so the quantity of money demanded will decrease.
answer
T
question
The money supply includes all assets like cash, demand deposits, bonds, and real estate.
answer
F
question
Monetary policy is when the central banks changes the interest rates by changing the money supply
answer
True
question
What is FED and what does it do?
answer
The Fed is the central bank of the United States and it regulates commercial banks and adjusts the money supply to adjust interest rates to meet economic goals. This is called Monetary Policy.
question
Money Multiplier Equation
answer
1/ reserve requirement
question
Assume the reserve requirement is .10. If the Fed
buys $10 billion worth of bonds the money supply will ______ by $___ billion.
buys $10 billion worth of bonds the money supply will ______ by $___ billion.
answer
1. increase
2. 100 Billion
2. 100 Billion
question
Assume the reserve requirement is .20. If the Fed
sells $10 billion worth of bonds the money supply
will ______ by __$__ billion.
sells $10 billion worth of bonds the money supply
will ______ by __$__ billion.
answer
decrease
50 billion
50 billion
question
Assume the reserve requirement is .10. If the Fed buys $5 billion worth of bonds the money supply will ________ by $__ billion.
answer
increase
50 billion
50 billion
question
Assume the reserve requirement is .50. If the Fed sells $5 billion worth of bonds the money supply will ________ by $__ billion.
answer
decrease
10
10
question
Assume the reserve requirement is .25. If the Fed sells $2 billion worth of bonds the money supply will ______ by $__ billion.
answer
decrease
8
8
question
1. If the FED increases the reserve requirement the money supply will __↓__ and interest rates ___↑___.
answer
.
question
If the FED sells bonds the money supply will __↓__
interest rates __↑__, and investment ___↓___.
interest rates __↑__, and investment ___↓___.
answer
...
question
If the FED decreases the reserve requirement the
money supply will __↑__ and interest rates __↓____.
money supply will __↑__ and interest rates __↓____.
answer
...
question
If the FED decreases the discount rate, the money
supply will ___↑___ and interest rates ___↓___.
supply will ___↑___ and interest rates ___↓___.
answer
...
question
If the FED buys bonds the money supply will__↑__
interest rates ___↓___, and investment ___↑___.
interest rates ___↓___, and investment ___↑___.
answer
...
question
Federal Funds Rate
answer
The federal funds rate is the interest rate that banks charge each other for loans. The Fed uses open market operations to hit this target rate.
question
Fractional Reserve Banking
answer
Process where banks hold a portion of deposits in reserve and loan the rest of the money out
question
Excess Reserves
answer
The amount banks are legally free to loan out. Excess reserves and required reserves make up total reserves
question
Demand Deposits
answer
bank deposits that can be withdrawn at any time
ex- checking account
ex- checking account
question
If the reserve requirement is .1 (or 10%) how much is this bank's required reserves and excess
reserves?
reserves?
answer
Req: 2,000
Excess: 3,000
Excess: 3,000
question
What is the maximum possible increase in the money supply if the bank loaned out all its
excess reserves?
excess reserves?
answer
30,000 ( 3,000 X 10)
question
Assume a customer deposits $5,000 into this bank, what is the initial change in the money
supply?
supply?
answer
there is no initial change
question
If the $5,000 deposit is placed in reserve, how much is demand deposits and excess reserves?
answer
demand: 25,000
excess: 7,500
excess: 7,500
question
Identify three options this bank has to avoid defaulting other than asking borrows to pay back loans.
answer
They can sell treasury bonds, borrow money from the Fed, or borrow money from another bank
question
Loanable Funds Market Graph
answer
1. Changes in perceived business opportunities
2. Changes in government borrowing
2. Changes in government borrowing
question
Shifters of Demand for loanable funds
answer
1. Changes in private savings behavior
2. Changes in public savings
3. Changes in foreign personal investment
4. Changes in expected profitability
2. Changes in public savings
3. Changes in foreign personal investment
4. Changes in expected profitability
question
Shifters of supply for loanable funds
answer
Demand increases so IR increases
question
What happens to the real IR if the government runs a deficit?
answer
Real IR inc
investment dec
economic growth dec
investment dec
economic growth dec
question
IF lenders decide to lend less real IR ____ investment ____ and economic growth ___
answer
Real IR dec
investmetn inc
economic growth inc
investmetn inc
economic growth inc
question
An increase in saving would cause real IR to ____ investment _____ and economic growth ___
answer
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