Chapter 15

Question 1

What power does the Federal Reserve have to do?

Answer 1

The power to create money

Question 2

Who maintains the bank account of the US Treasur?

Answer 2

The Fed

Question 3

What are the most important assets that serve as means of payment in the US today?

Answer 3

1. Currency
2. Total reserves held by banks at the Fed
3. Checkable deposits- your checking or debit account
4. Savings, deposits, money market mutual funds, and small time deposits

Question 4

What is a liquid asset?

Answer 4

an asset that can be used for payments or quickly and without loss of value, be converted into an asset that can used for payments

Question 5

What is the most liquid asset?

Answer 5

Currency since it can be spent almost anywhere

Question 6

What are the 3 most important definitions of the money supply?

Answer 6

1. The monetary base
2. M1
3. M2

Question 7

What is the monetary base?

Answer 7

Currency and total reserves held at the Fed

Question 8

What is M1?

Answer 8

Currency plus checkable deposits

Question 9

What is M2?

Answer 9

M1 plus savings deposits, money market mutual funds, and small time deposits

Question 10

All major banks have accounts at the…

Answer 10

Federal Reserve

Question 11

What is fractional reserve banking?

Answer 11

A system where banks hold only a
fraction of deposits in reserve, lending
the rest.

Question 12

How do banks earn profit on the money that they hold for you?

Answer 12

They keep some of the money in the bank and loan the rest, charging a higher interest rate

Question 13

What is the reserve ratio?

Answer 13

The ratio of reserves to deposits.

Question 14

What is the money multiplier?

Answer 14

The amount the money supply expands
with each dollar increase in reserves.
MM = 1/RR.

Question 15

What is the reserve ratio primarily determined by?

Answer 15

How liquid the banks wish to be

Question 16

What kind of institution is the Fed?

Answer 16

quasi-independent filled with checks and balances to insulate it from political pressures

Question 17

How many members are on the board of governors in the Fed? Who are they appointed by? How many years are they appointed for?

Answer 17

7, President and confirmed by the Senate, 14 years

Question 18

What does the Federal Open Market Committee do?

Answer 18

Determine the stance of monetary policy

Question 19

What are the 3 tools the Fed uses to influence the money supply?

Answer 19

1. Open market operations
2. Discount rate lending and the term auction facility
3. Paying interest on reserves held by banks at the Fed

Question 20

What is an open market operation?

Answer 20

The Fed buys and sells government bonds(usually T-bills) to change the money supply?

Question 21

If the Fed wants to increase the money supply it..

Answer 21

buys T-bills

Question 22

If the Fed wants to decrease the money supply it..

Answer 22

sells T-bills

Question 23

When the Fed is buying bonds(expansionary monetary policy) what does this do to the interest rate?

Answer 23

It pushes them down and increases the demand for bonds(bond prices increase)

Question 24

When the Fed is selling bonds(contractionary monetary policy) what does this do to the interest rates?

Answer 24

It pushes the interest rates up and increases the supply of bonds(bond prices decrease)

Question 25

What is quantitative easing?

Answer 25

Situation that occurs when the Fed buys longer term government bonds or other securities

Question 26

Selling bonds reduces the..

Answer 26

money supply

Question 27

An open market sale of bonds effectively slows…

Answer 27

the economy

Question 28

What is quantitative tightening?

Answer 28

When the Fed sells longer-term

government bonds or other securities.

Question 29

Why is the Fed the lender of last resort?

Answer 29

Because it can create money by increasing reserve accounts

Question 30

What is the discount rate?

Answer 30

The interest rate banks pay when they borrow directly from the Fed at the discount window

Question 31

What is monetary policy?

Answer 31

When the Fed uses tools available to motivate changes in AD

Question 32

What is systemic risk?

Answer 32

the risk that the failure of one financial institution can bring down other institutions as well

Question 33

What is moral hazard?

Answer 33

the idea that people who are insulated from risk will tend to take on more risk