Question

Chapter 12:

What is money? What are the three functions of money? What is the difference between fiat money and commodity money?

How can banks affect the money supply? What is the reserve ratio? What is the money multiplier? How did banking develop? How are required reserves different from excess reserves?

Know the differences between bond markets, stock markets, banks, and mutual funds, and know the characteristics of bonds, stocks, banks, and mutual funds. How do banks help solve problems of asymmetric information (adverse selection and moral hazard)? Why is a bank’s capital important and how does it relate to solvency?

Chapter 13:

What is the Federal Reserve System? Who makes up the Federal Open Market Committee? What are the Fed’s tools of monetary control? How can the Fed increase/decrease the money supply using open market operations, lending reserves to banks, changing reserve requirements, and paying interest on reserves? What is expansionary monetary policy? What is contractionary monetary policy?

Chapter 14:

What happens to the value of money as the price level rises? How are the two related?

What is the velocity of money? Suppose we produce 100 pizzas and each pizza sells for $10. If we spend $1,000 on pizza per year and we only have $50 in our economy, what is the velocity of money? What do monetarists believe about the Quantity Theory of Money?

What is the market for loanable funds? Be able to derive the graph: know who makes up the supply and who makes up the demand and be able to determine how the liquidity effect, income effect, price-level effect, and expectations effect affects the interest rate.

Chapter 21:

What is a trade surplus vs. a trade deficit? What are some factors that affect trade? What is the net capital outflow? What factors influence net capital outflow? How are net exports and net capital outflow related?

How are net exports affected when there is an appreciation/depreciation of the dollar? (How do imports change? How do exports change?) What is purchasing power parity? Know the difference between the nominal exchange rate and the real exchange rate.

How do tariffs and import quotas affect consumer surplus, producer surplus, and government revenues? What are some of the arguments for the restriction of trade?

Answer 1

Answer 12:

Money is anything that is used as a medium of exchange. The three functions of money are as follows:

1. Medium of exchange

2. Store of Value

3. Unit of Account

Fiat money is a form of legal tender that does not have any intrinsic value. On the other hand, commodity money is a money whose value comes from a commodity or good and thus has an intrinsic value.

The banks can affect the level of money supplied in the economy by changing the rate of interest at which it gives loans to borrowers. Reserve ratio is the proportion of the deposits which the commercial banks have to keep in the Central Bank of the country. The money multiplier tells the rate at which money supply changes with changes in various ratios. Fractional system of lending led to the development of banking.Required Reserves are kept in the Central bank while excess reserves are used for lending purposes.

The problem of moral hazard and adverse selection can be reduced by making people accountable for their actions. The bank capital is important to maintain liquidity in the economy and if banks do not have required capital they become insolvent.