1. Section 5
Test Review

2. Share of ownership in a corporation
What is a stock?
Share of ownership in a corporation

3. What is a bond?
IOU that pays interest

4. What is investment spending? Example.
Business spending on productive equipment

5. What is a budget surplus?
Tax revenue greater than spending

6. What is a budget deficit?
Spending greater than tax revenue

7. What function do banks perform?
direct savings to investment

8. real estate, long term bonds/savings
What is liquidity?
What assets are the most liquid?
Cash/currency
What assets are least liquid?
real estate, long term bonds/savings

9. Asset that can buy goods and services
How do we define money?
Asset that can buy goods and services

10. What are the three main functions that money performs?
Medium of exchange
Unit of account
Store of value

11. Derives value from government order (e.g. US dollar)
What is fiat money?
Derives value from government order (e.g. US dollar)

12. What is in the M1 money supply?
Most liquid
Currency
Checkable deposits
Traveler’s checks

13. What is in the M2 money supply?
Savings accounts
CDs

14. Given a present dollar value and a certain rate of interest, how does one calculate future value?
$Y x (1 + r)

15. What is the required reserve ratio?
Amount banks must set aside as vault cash/reserves at Fed

16. If Zeke makes a $1,000 deposit into his checking account, what happens to the money supply initially?
No change

17. Excess reserves x money multiplier (5)
If the reserve requirement is 20%, what is the eventual impact of Zeke’s deposit on the money supply?
Excess reserves x money multiplier (5)

18. How do banks create money?
Make loans

19. What is the formula for the money multiplier?
1/res. Req.

20. How are the reserve ratio and the money multiplier related?
inversely

21. ASSETS
LIABILITIES
Loans $80
$100
Reserves $20

22. Using chart above, how will an additional $100 deposit affect the banks excess reserves?
Increase $80

23. Using chart above, how will the deposit affect the money supply?
Increase $400

24. List the three expansionary monetary policy options?
Buy bonds
Lower discount rate
Lower reserve requirement

25. When does the Fed want to implement expansionary policy?
In recession

26. List the three contractionary monetary policy options?
Sell bonds
Raise discount rate
Raise reserve requirement

27. When does the Fed want to implement contractionary policy?
Inflation

28. If the Fed lowered the reserve requirement from 10% to 5%, then the money multiplier would go from to .
10 to 20

29. What is the Federal Funds Rate?
Bank to bank interest rate

30. What is the main responsibility of the Fed?
Control the money supply

31. What are open market operations?
Fed buying and selling bonds/treasuries/securities

32. What OMO is appropriate to combat inflation?
SELL bonds

33. What OMO is appropriate to combat a recession?
BUY/PURCHASE bonds

34. $500 billion ($100 billion x 1/.2)
If the Fed BUYS or purchases $100 billion in bonds with a 20% reserve requirement, the total change to the money supply will be
$500 billion ($100 billion x 1/.2)

35. SELL $5 billion of bonds ($20 billion/4)
If actual GDP is $150 billion and potential GDP is $130 billion, what could the Fed do to close the gap with a reserve requirement of 25%?
SELL $5 billion of bonds ($20 billion/4)

36. How will an open market SALE of bonds/securities affect:
Bank reserves - decrease
Money supply - decrease
Interest rates - increase
Investment spending - decrease
Growth - decrease

37. How will an open market PURCHASE of bonds/securities affect:
Bank reserves - increase
Money supply - increase
Interest rates - decrease
Investment spending - increase
Growth - increase

38. Using a correctly-labeled graph of the MONEY MARKET, show the effect of an open market SALE of bonds/securities on interest rates.

39. Using a correctly-labeled graph of the LOANABLE FUNDS MARKET, show the effect of an expansionary FISCAL POLICY.

40. Interest rates – increase Investment – decrease Growth - decrease
How will this affect interest rates, investment spending and economic growth?
Interest rates – increase
Investment – decrease
Growth - decrease