Money and the Monetary System
27 Questions
1 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is the primary purpose of open market operations conducted by the Fed?

  • To expand or contract the money supply in the economy. (correct)
  • To influence the reserve-deposit ratio directly.
  • To control the discount rate for interbank loans.
  • To set regulations for how banks manage their reserves.

    • How does the Fed influence the reserve-deposit ratio through interest on reserves?

  • By mandating banks to invest in securities rather than hold reserves.
  • By increasing the reserve requirements imposed on banks.
  • By lowering the interest rate paid on reserves, making holding reserves less attractive. (correct)
  • By taking loans from banks at the discount window.

    • What does the discount rate refer to in the context of borrowing from the Fed?

  • The interest rate at which banks can borrow from the Fed using the discount window. (correct)
  • The interest rate charged on loans from commercial banks to the Fed.
  • The interest rate that banks pay on deposits held at the Fed.
  • The interest rate set for government securities offered by the Fed.

    • What effect does a higher interest rate on reserves have on banks' reserve holdings?

    <p>It incentivizes banks to hold more reserves to maximize their interest income.</p> Signup and view all the answers

    Which of the following reflects a consequence of lowering the discount rate?

    <p>The money supply in the economy is likely to expand.</p> Signup and view all the answers

    What is the primary function of money as a medium of exchange?

    <p>It facilitates the buying and selling of goods and services.</p> Signup and view all the answers

    Why is money considered the most liquid asset in an economy?

    <p>It is widely accepted and easily convertible to goods and services.</p> Signup and view all the answers

    Which property of money describes its ability to maintain its value over time?

    <p>Store of Value</p> Signup and view all the answers

    What distinguishes fiat money from commodity money?

    <p>Fiat money is ordered by authority to be accepted in transactions.</p> Signup and view all the answers

    Which of the following assets is an example of commodity money?

    <p>Gold</p> Signup and view all the answers

    What is considered when determining what counts as money within an economy?

    <p>The total value of all assets that can be used as money.</p> Signup and view all the answers

    How does money function as a unit of account?

    <p>It simplifies the recording of debts and pricing of goods.</p> Signup and view all the answers

    What happens if prices are rising regarding money's function as a store of value?

    <p>The amount of goods that can be purchased with a given quantity decreases.</p> Signup and view all the answers

    What components are included in M1?

    <p>Currency in circulation, checkable deposits, and traveler's checks</p> Signup and view all the answers

    What do banks do with the deposits they receive?

    <p>Lend out a portion to earn interest</p> Signup and view all the answers

    Which expression represents the money supply in relation to the monetary base and ratios?

    <p>M = (cr + 1)/(cr + rr) × B</p> Signup and view all the answers

    What is the role of the central bank in the monetary system?

    <p>Influence the money supply using policy instruments</p> Signup and view all the answers

    What happens to the money multiplier when reserve requirements increase?

    <p>It decreases, reducing money supply</p> Signup and view all the answers

    How do changes in the currency-deposit ratio (cr) affect the money supply?

    <p>A lower cr leads to higher money supply</p> Signup and view all the answers

    Which component does NOT contribute directly to total bank liabilities?

    <p>Securities</p> Signup and view all the answers

    What is the formula for the monetary base (B)?

    <p>B = C + R</p> Signup and view all the answers

    Which of the following describes demand deposits?

    <p>Money that can be withdrawn on-demand at any time</p> Signup and view all the answers

    What is total bank assets composed of?

    <p>Reserves, loans, and securities purchases</p> Signup and view all the answers

    What does an increase in the monetary base (B) lead to?

    <p>Increased money supply based on the money multiplier</p> Signup and view all the answers

    What is one of the primary tools of monetary policy used by the Fed?

    <p>Open-market operations</p> Signup and view all the answers

    Which of the following is an endogenous variable in the monetary system?

    <p>Demand deposits (D)</p> Signup and view all the answers

    How does the reserve-deposit ratio (rr) affect banks' loan-making ability?

    <p>Lower rr increases loans making potential</p> Signup and view all the answers

    Study Notes

    Money and the Monetary System

    • Definition of Money: Money is a readily usable asset for transactions.
    • Functions of Money:
      • Medium of Exchange: Facilitates buying and selling by being commonly accepted.
      • Store of Value: Can be saved and held for future use, although its value isn't perfectly stable (affected by inflation).
      • Unit of Account: Provides terms for quoting prices and debts.
    • Types of Money:
      • Fiat Money: Has no intrinsic value, but is ordered by an authority to be accepted as a medium of exchange (legal tender).
      • Commodity Money: Has value beyond its use as money (e.g., gold, silver). A gold standard economy uses gold as money.

    The Money Supply

    • What Counts as Money: The total value of assets usable for transactions (M).
      • Currency (physical money)
      • Checkable deposits (funds in checking accounts used for transactions) are counted as money due to usability.
      • Traveler's checks.
    • Measures of Money Supply:
      • M1: Includes currency, checkable deposits, and traveler's checks.
      • M2: Includes M1 plus other deposits (e.g., small savings, money market mutual funds).

    Banks in the Monetary System

    • Banks' Role: Banks take deposits, borrow money, and invest capital.
    • Money Creation: Loans and investments create money beyond initial deposits.
    • Bank Balance Sheet: Reflects assets (reserves, loans, securities) and liabilities (deposits, debt, and capital). Assets = Liabilities + Capital
      • Example: If the bank has $200 in reserves, $750 in deposits, $500 in loans, $200 in debt and $300 in securities, $50 in capital.
    • Capital: The owners' invested funds.

    Central Banks' Influence

    • Monetary Base (B): The total currency and reserves.

    • B=C+R : Monetary base is the sum of:

      • Currency (C), held by the public.
      • Reserves (R), held by banks.

    • Currency–deposit Ratio (cr): The proportion of deposits held as cash.

    • Reserve–deposit Ratio (rr): The proportion of deposits held as reserves.

    • Money Multiplier (m):

    • The relationship between Monetary Base, Money supply and money multiplier: M = (cr +1) / (cr + rr) * B = m *B; m>1 m = the money multiplier.

    • Factors influencing the money supply:

      • Changes in the money multiplier (from changes in reserve and currency-deposit ratios).
      • Changes in the monetary base (from actions of central banks).

    • Central Bank Tools:

      • Open Market Operations: Buying and Selling government bonds to influence the money supply.
      • Discount Rate: The interest rate charged by the central bank on loans to banks.
      • Reserve Requirements: Regulations that dictate the minimum amount of reserves banks must hold, which influences the reserve–deposit ratio.
      • Interest on Reserves: Interest paid by the central bank on reserves held by banks. This rate can influence the behavior of banks and the reserve-deposit ratio.

    • Relationship between money supply, and monetary policy tools:

      • To increase the money supply, a central bank can use open market operations to buy government bonds.
      • To decrease the money supply, a central bank can use open market operations to sell government bonds.

    Studying That Suits You

    Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

    Quiz Team

    Description

    This quiz explores the definition of money and its essential functions in the economy. It covers various types of money, including fiat and commodity money, and discusses the components of the money supply. Test your understanding of these foundational concepts of the monetary system.

    More Like This

    Kvíz o penězích
    5 questions

    Kvíz o penězích

    EnoughIguana avatar
    EnoughIguana
    Financial System and Money Functions Quiz
    5 questions

    Financial System and Money Functions Quiz

    BountifulPearl avatar
    BountifulPearl
    Monetary Systems: Historical Landmarks
    8 questions

    Monetary Systems: Historical Landmarks

    NicestTimpani avatar
    NicestTimpani
    Functions of Money
    18 questions

    Functions of Money

    FastestGrowingBasilisk avatar
    FastestGrowingBasilisk
    Use Quizgecko on...
    Browser
    Open
    Browser
    Browser