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					AP Macro Ch. 29 The Monetary System                 1      AP Macro Ch. 29 The Monetary System                    2

______ is the set of assets in an economy that people      What are the three functions of money?
regularly use to buy goods and services from other
people.


                Money                                      Medium of exchange, unit of account, store of value.


AP Macro Ch. 29 The Monetary System                 3      AP Macro Ch. 29 The Monetary System                 4

_______ is the ease with which an asset can be             __________ is an item that buyers give to sellers when
converted into the economy’s medium of exchange.           they want to purchase goods and services.



             Liquidity                                                Medium of exchange


AP Macro Ch. 29 The Monetary System                 5      AP Macro Ch. 29 The Monetary System                 6

_________ is the yardstick people use to post prices and   ___________ is an item that people can use to transfer
record debts.                                              purchasing power from the present to the future.



               Unit of account                                        Store of value


AP Macro Ch. 29 The Monetary System                 7      AP Macro Ch. 29 The Monetary System                    8

What is the most liquid asset?                             _________ is money that takes the form of a
                                                           commodity with intrinsic value.



                    Money                                                  Commodity money


AP Macro Ch. 29 The Monetary System                 9      AP Macro Ch. 29 The Monetary System                 10

________ is money without intrinsic value that is used     The quantity of money circulating in the U.S. is
as money because of government decree.                     sometimes called the ___________.



                  Fiat money                                                Money stock
                                                            AP Macro Ch. 29 The Monetary System                   12
AP Macro Ch. 29 The Monetary System                   11
                                                            __________ are balances in bank accounts that
________ is the paper bills and coins in the hands of the
                                                            depositors can access on demand by writing a check.
public.



               Currency
                                                                       Demand deposits


AP Macro Ch. 29 The Monetary System                   13    AP Macro Ch. 29 The Monetary System                   14

Why are credit cards not considered money?                  What is the central bank of the U.S. called?




They are a way to simply defer payment of an item.                    The Federal Reserve (FED)


AP Macro Ch. 29 The Monetary System                   15
                                                            AP Macro Ch. 29 The Monetary System                   16
A _________ is an institution designed to oversee the
                                                            The ______ is an independent corporation that regulates
banking system and regulate the quantity of money in
                                                            the money supply in the U.S. banking system.
the economy.



                                                                                 FED
               Central bank

AP Macro Ch. 29 The Monetary System                   17    AP Macro Ch. 29 The Monetary System                   18

The FED is made up of _________ regional Federal            What are the two major jobs of the FED?
Reserve Banks located in major cities around the
country.
                                                            To regulate banks to ensure the health of the nation’s
                                                            banking system.
                                                            To control the quantity of money available in the
                      12                                    economy.


AP Macro Ch. 29 The Monetary System                   19    AP Macro Ch. 29 The Monetary System                   20

_________ is the quantity of money available in the         ______________ is the setting of the money supply by
economy.                                                    policymakers in the central bank (FED).



               Money supply                                            Monetary policy
AP Macro Ch. 29 The Monetary System                   21   AP Macro Ch. 29 The Monetary System                   22

The _______ within the FED is responsible for setting      The primary way in which the FED increases or
money supply.                                              decreases the supply of money is through ______.


                                                           Open Market Operations (buying and selling U.S.
     Federal Open Market Committee (FOMC)                  government bonds)


AP Macro Ch. 29 The Monetary System                   23   AP Macro Ch. 29 The Monetary System                   24

How does the FED increase the money supply? (VERY          How does the FED decrease the money supply? (VERY
IMPORTANT QUESTION)                                        IMPORTANT QUESTION)

                                                           It sells government bonds from its portfolio to the
It creates dollars and uses them to purchase government    public. Money is then taken out of the hands of the
bonds from the public through the nations’ bond market.    public and the supply of money falls.


AP Macro Ch. 29 The Monetary System                   25
                                                           AP Macro Ch. 29 The Monetary System                   26
_________ are deposits that banks have received but
                                                           What tool do we use to describe the financial position of
have not loaned out.
                                                           banks?



                                                                          The T-account
                Reserves


AP Macro Ch. 29 The Monetary System                   27   AP Macro Ch. 29 The Monetary System                   28

_________ is where a banking system in which banks         ________ is the fraction of deposits that banks hold as
hold only a fraction of deposits as reserves.              reserves.



           Fractional-reserve banking                                 Reserve ratio


AP Macro Ch. 29 The Monetary System                   29   AP Macro Ch. 29 The Monetary System                   30

When banks hold only a fraction of deposits in reserve     Why isn’t wealth created when a bank loans out money
and loan out the rest, they are __________.                from deposits?




              Creating money                                       Because it also creates debt.
AP Macro Ch. 29 The Monetary System                   31   AP Macro Ch. 29 The Monetary System                32

_________ is the amount of money the banking system        The money multiplier = _____________.
generates with each dollar of reserves.



               Money multiplier                                         1 / reserve ratio


AP Macro Ch. 29 The Monetary System                   33   AP Macro Ch. 29 The Monetary System                34

_____________ is the purchase and sale of U.S.             If the Fed wants to increase the supply of money, it
government bonds by the FED.                               creates dollars and uses them to __________ from the
                                                           public in the nation’s bond market.


         Open market operations                                      Purchase government bonds


                                                           AP Macro Ch. 29 The Monetary System                36
AP Macro Ch. 29 The Monetary System                   35
                                                           ___________ are regulations on the minimum amount
If the Fed wants to lower the supply of money, it
                                                           of reserves that banks must hold against deposits.
___________ from its portfolio to the public in the
nation’s bond markets.

                                                                     Reserve requirements
           Sells government bonds


AP Macro Ch. 29 The Monetary System                   37   AP Macro Ch. 29 The Monetary System                38

_________ is the interest rate on the loans that the FED   When a bank cannot meet its reserve requirements, it
makes to banks.                                            may borrow reserves from __________.



             Discount rate                                               The FED


AP Macro Ch. 29 The Monetary System                   39
                                                           AP Macro Ch. 29 The Monetary System                40
What affect does a higher discount rate have on the
                                                           A lower discount rate encourages banks to lend their
money supply?
                                                           reserves (and borrow from the FED) which in turn will
                                                           ______ the money supply.
A higher discount rate discourages banks from
borrowing from the Fed and likely encourages banks to
hold onto larger amounts of reserves. This in turn
                                                                       Increase
lowers the money supply.
AP Macro Ch. 29 The Monetary System                    41    AP Macro Ch. 29 The Monetary System                   42

Which tool does the FED use the least in controlling the     In a system of fractional-reserve banking, the amount of
money supply?                                                money in the economy depends in part on the behavior
                                                             of __________ and ___________.


 Reserve requirements because it would be too
interruptive.                                                          Depositors; bankers

AP Macro Ch. 29 The Monetary System                    43
                                                             AP Macro Ch. 29 The Monetary System                   44
Today, deposits are guaranteed through the _________.
                                                             The _________ is the short-term interest rate that banks
                                                             charge one another for loans.



     Federal Depository Insurance Corporation
                                                                       Federal funds rate
              (FDIC)

AP Macro Ch. 29 The Monetary System                    45    AP Macro Ch. 29 The Monetary System                   46

When the federal funds rate rises or falls, other interest   Money is different from other assets in the economy
rates often move in the _________ direction.                 because it is the most ______ asset available.




                 Same                                                         liquid

				
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