ECON 2010 Study Guide - Midterm Guide: Commodity Money, Savings Account, Money Supply

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viridianpug644

18 Jun 2014

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Chapter 13- money, banks and the federal reserve. Commodity money- a good used as money that also has value independent of its use of money. Federal reserve- the central bank of the us. Fiat money- money, such as paper currency, that is authorized by a central bank or government body and that does not have to be exchanged by the central bank for gold or some other commodity money. M1- the narrowest definition of the money supply; the sum of currency in circulation, checking account deposits in banks, and the holding of traveler"s checks. M2- adds money market, mutual share funds, small time deposits, and savings account deposits. Reserves- deposits that banks keep as cash in its vault or on deposit with the federal. Required reserves- reserves that banks are legally required to hold, based on its checking account deposits. Fractional reserve banking (required reserves are less than 100% of deposit)

Related Questions

Suppose households hold $0.30 in currency for every $1 they have as demand deposits (checking accounts). Also, banks hold 20% of their deposits as reserves.

A. If the Federal Reserve buys $10 of government bonds from banks, by how would would the following change (include a minus sign if the value falls)?
i. the money supply (M1)
ii. the monetary base

B. Instead of Bonds being sold, suppose that households chose to hold less in currency and more in demand deposits. Explain how that would change
i. Money supply (M1)
ii. the monetary base

viridianserval415

1. In a system of fractional-reserve banking, even without any action by the central bank, the money supply declines if households choose to hold (less, more) currency or if banks choose to hold (less, more) excess reserves.

2. If the Fed makes an open-market purchase of government bonds, it will (decrease, increase) the money supply. Whereas if there is an increase in the discount rate on Fed lending, it will (decrease, increase) the money supply.

3. Chloe takes $100 of currency from her wallet and deposits it into her checking account. If the bank adds the entire $100 to reserves, the money supply(decreases, doesn't change, increases), but if the bank lends out some of the $100, the money supply (decreases, doesn't change, increases).

4. If the reserve ratio is 0.25 and the central bank increases the quantity of reserves in the banking system by $120, the money supply increases by how much?

cyanworm559

In a country the monetary base is 1000. People hold one-fourth of their money in the form of currency (and thus three-fourths as bank deposits). Banks hold a third of their deposits in reserve.

a) What is reserve-deposit ratio, currency-deposit ratio, the money multiplier, and the money supply?

b) One day, Government passed a new rule that people needs to pay tax on their currency holdings, and people now want to hold one-fifth their money in the form of currency (and thus four-fifths as bank deposits). If the central bank does nothing, what is the money supply?

c) The central bank wants to conduct an open market operation to keep the money supply at its original level, does it buy or sell government bonds? Calculate how much the central bank needs to transact.

ECON 2010 Study Guide - Midterm Guide: Commodity Money, Savings Account, Money Supply

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