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What is Money? Unit of Account and Store of Value

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What is Money? Unit of Account and Store of Value

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Questions and Answers

What is the impact of an open market purchase on bank reserves?

It decreases the monetary base

It increases bank reserves (correct)

It decreases bank reserves

It has no impact on bank reserves

What is the role of the Fed as the lender of last resort?

The Fed creates new money by making loans

The Fed sets the required reserve ratio

The Fed rarely changes the monetary base

The Fed is ready to lend reserves to depository institutions that are short of reserves (correct)

What limits the quantity of deposits that banks can create?

The required reserve ratio

The monetary base

Desired currency holding

All of the above (correct)

What is included in the monetary base?

Federal Reserve notes and coins Signup and view all the answers

What is the formula for the money multiplier?

(1 + C/D) / (R/D) Signup and view all the answers

If the currency drain ratio (C/D) is 0.4 and the desired reserve ratio (R/D) is 0.2, what is the money multiplier?

3.5 Signup and view all the answers

In the given example, how much does the bank keep as reserves when deposits increase by $80,000? (C/D = 0.5, R/D = 0.1)

$10,000 Signup and view all the answers

What is the main difference between M1 and M2 in the United States?

M1 includes currency and checking deposits, while M2 includes time and saving deposits. Signup and view all the answers

Why are some saving deposits in M2 not considered money?

Because they are not instantly convertible into a means of payment. Signup and view all the answers

Which of the following is a component of both M1 and M2?

Currency Signup and view all the answers

What is the significance of the items in M1?

They are highly liquid assets that can be instantly converted into means of payment. Signup and view all the answers