Download Questions and answers, Money, Banks, and the Federal Reserve System: An Introductory Overv and more Exercises Monetary economics in PDF only on Docsity!
18 Questions with answers on ho5e-ch14-
macroeconomics-new-taggedpdf
You'll find the list of questions at the end of the document
- What are the four primary functions of money?
The four primary functions of money are: 1. Medium of exchange: Money is acceptable as payment for goods and services. 2. Unit of account: Money provides a standard way to measure value. 3. Store of value: Money allows people to defer consumption by storing value. 4. Standard of deferred payment: Money facilitates exchanges across time.
- Explain the concept of 'double coincidence of wants' and why money eliminates this problem.
The 'double coincidence of wants' is a situation in a barter system where two parties each possess a good or service that the other wants. Without this coincidence, trade cannot occur. Money eliminates this problem because it acts as a medium of exchange that is widely accepted, so individuals don't need to find someone who specifically wants what they have to offer; they can simply sell it for money and then use that money to buy what they need.
- What is fiat money, and what are its advantages and disadvantages?
Fiat money is money that is authorized by a central bank or governmental body and does not have to be exchanged for a commodity like gold. An advantage of fiat money is that it gives central banks more flexibility in controlling the money supply. A disadvantage is that its value depends on the confidence people have in it; if people lose faith in the currency, it can become worthless.
- Describe the difference between M1 and M2 money supply.
M1 is the narrowest definition of the money supply, including currency in circulation, checking account deposits, and traveler's checks. M2 is a broader definition that includes M1, plus savings account balances, small- denomination time deposits, balances in money market deposit accounts, and non-institutional money market fund shares.
- Why are credit cards not considered part of the money supply?
Credit cards are not considered part of the money supply because they represent a short-term loan from the bank. The transaction is not complete until the loan is paid off by transferring money. The credit card itself is just a convenient way to access credit, not a form of money.
- Explain how banks create money through lending.
When a bank receives a deposit, it is required to hold a fraction of it as reserves (required reserves). The remaining portion can be loaned out. This loan becomes a new deposit in another bank, which can then lend out a portion of that deposit, and so on. This process multiplies the initial deposit, effectively creating more money in the economy.
- What are required reserves and excess reserves, and how do they relate to the required reserve ratio?
Required reserves are the minimum amount of reserves a bank is legally required to hold, based on its checking account deposits. Excess reserves are any reserves held by a bank above the legal requirement. The required reserve ratio (RR) is the percentage of deposits that banks are required to keep as reserves.
- Explain how a bank's balance sheet reflects its operations, including the relationship between assets, liabilities, and reserves.
A bank's balance sheet lists its assets on the left and its liabilities and stockholders' equity on the right. Assets include loans and securities (investments), while liabilities primarily consist of deposit accounts (money owed to depositors). Reserves are deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve. The bank uses deposits to make loans and buy securities, generating profit while maintaining enough reserves to meet withdrawal demands and regulatory requirements.
- What is a fractional reserve banking system?
A fractional reserve banking system is one in which banks keep less than 100 percent of deposits as reserves. This means that banks lend out a portion of the money deposited with them, creating new money in the economy.
- Explain how the Federal Reserve can use open market operations to increase the money supply.
To increase the money supply, the Federal Reserve buys U.S. Treasury securities (Treasury bills, notes, and bonds) from banks and other institutions. When the Fed buys these securities, it injects money into the banking system, increasing banks' reserves. With more reserves, banks can make more loans, which in turn increases the money supply.
- What is the simple deposit multiplier, and how is it calculated?
The simple deposit multiplier is the ratio of the change in checking account deposits to the change in reserves. It is calculated as 1/RR, where RR is the required reserve ratio. For example, if the required reserve ratio is 10% (0.10), the simple deposit multiplier is 1/0.10 = 10.
- What is a bank run, and how can a central bank like the Federal Reserve prevent it?
- Explain how an open market purchase of $10 million by the Fed affects the banking system's T-account.
When the Fed engages in an open market purchase of $10 million, the banking system's T-account reflects an increase in reserves of $10 million. This increase in reserves is a liability for the Fed, as it now owes this amount to the banking system. Simultaneously, the Fed gains assets equal to the debt owed to it by the banking system, representing the Treasury securities it purchased.
18 Questions on ho5e-ch14-macroeconomics-
new-taggedpdf
What are the four primary functions of money?
Explain the concept of 'double coincidence of wants' and why money eliminates this problem.
What is fiat money, and what are its advantages and disadvantages?
Describe the difference between M1 and M2 money supply.
Why are credit cards not considered part of the money supply?
Explain how banks create money through lending.
What are required reserves and excess reserves, and how do they relate to the required reserve ratio?
Explain how a bank's balance sheet reflects its operations, including the relationship between assets, liabilities, and reserves.
What is a fractional reserve banking system?
Explain how the Federal Reserve can use open market operations to increase the money supply.
What is the simple deposit multiplier, and how is it calculated?
What is a bank run, and how can a central bank like the Federal Reserve prevent it?
What is the discount rate, and how does the Federal Reserve use it to influence the money supply?
Explain the quantity theory of money and its implications for inflation.
What is hyperinflation, and what are its typical causes and consequences?
What is the role of the Federal Deposit Insurance Corporation (FDIC)?
Describe the actions the Fed took during the Great Depression and why some economists criticize these actions.
Explain how an open market purchase of $10 million by the Fed affects the banking system's T-account.
