Money & Banking Quiz

Modules 22-25

10 Questions

Types of Financial Assets (Mod 22) 

Review the following:

B. Types of Financial Assets
1. Loans
A loan is a lending agreement between an individual lender and an individual borrower.
2. Bonds
The seller of a bond promises to pay a fixed sum of interest each year and to repay the principal—the value stated on the face of the bond—to the owner of the bond on a particular date.
3. Loan-backed Securities
Loan-backed securities are assets created by pooling individual loans and selling shares in that pool (a process called securitization).
4. Stocks
A stock is a share in the ownership of a company.

Role of Money (Mod 23):

B. Roles of Money
1.  Medium of Exchange
2.  Store of Value
3.  Unit of Account
C. Types of Money

Types of Money (Mod 23):

-Commodity money:   something used as money, normally gold or silver, that has intrinsic value in other uses.
- Commodity-backed money: a medium of exchange with no intrinsic value whose ultimate value was guaranteed by a promise that it could always be converted into valuable goods on demand.
- Fiat money: money whose value derives entirely from its official status as a means of exchange

U.S. Dollar & M1 (Mod 23)

U.S dollar is no longer backed by gold...full faith and credit of the US Government and The Federal Reserve.

M1 is checkable deposits and currency, coin and the occasional traveler’s check. M1 is the most liquid of all money aggregates.

Present vs. Future Value (Mod 24)

Present value: PV = FV/(1+r)  Future value:  FV = PV*(1+r)

Required reserves, Reserve Ratio & Money Multiplier (Mod 25)

Reserve Requirements
The Federal Reserve establishes the required reserve ratio for banks.  This policy insures that the banks will have a certain fraction of all deposits on hand in the event that customers wish to withdraw money. In the United States, the required reserve ratio for checkable bank deposits is 10%.
The multiplier is simply 1/rr

To apply the multiplier, be sure to multiply (1/rr)  to new deposits.  Make sure that you subtract required reserves the remainder is excess reserves and must be applied to the multiplier to figure out the MAXIMUM expansion of the money supply.

Federal Reserve Open Market Operation (from class)

 The Federal Reserve uses Open Market Operations to shift the money supply curve.  If the Fed is concerned about inflation, it will decrease the money supply by selling bonds to banks and decreasing their excess reserves.  If the Fed is concerned about slow economic growth, it will increase the money supply by buying bonds from banks and increasing their excess reserves.

If you’ve read this, then for #11 tomorrow mark A, C & E.  Ace which is what he is.