Economics 470/570 Definitions
Winter 2006
Review Questions for Exam
[PDF FILE]
Medium of exchange/Double coincidence of wants
Unit of account/Multiplicity of prices
Store of value/Liquidity
Financial intermediary
Direct and indirect finance
Liquidity
FOMC
FAC
Discount window
Discount rate
Member bank
Federal Funds rate
Asset
Liability
Demand Deposit
Bank Reserves
Reserve Requirement
Required Reserves
Excess Reserves
Essay
1. How is money measured? Why is there more than one definition of the money supply?
2. What are the functions of money, i.e. why does money exist? Relative to a barter economy, what problems are overcome by the use of money?
3. Describe the evolution of money from barter to fiat money.
4. Describe the main function of financial markets. Explain how direct finance and indirect finance differ.
5. How do financial intermediaries, through their ability to pool resources promote more efficient use of financial resources? Be sure to cover risk pooling, the pooling of small investors, and pooling over time in your answer.
6. How do financial intermediaries reduce default risk, transactions costs, and matching costs?
7. Briefly describe the major functions of Federal Reserve district banks.
8. Who is on the FOMC? What does the FOMC do?
9. Describe the structure of Federal Reserve districts and Federal Reserve banks.
10. Describe the structure and function of the Board of Governors of the Federal Reserve System.
11. How has the power structure of the Federal Reserve System shifted over time?
12. How independent is the Fed? What factors contribute to independence? What factors work against independence? Discuss arguments for and against the independence of the Fed.
13. Write down the government budget constraint and explain each term.
14. Why is a demand deposit an asset for an individual, but a liability of the bank?
15. Show the t-accounts and the balance sheet for the following series of transactions.
(i) Open a bank with 10 million dollars, put 3 million into buildings and equipment.
(ii) Put 2 million of the cash into T-bills.
(iii) Deposit 1.5 million into regional Fed bank.
(iv) Collect 4 million in deposits from other banks.
(v) Let the required reserve ratio be 20% and show what happens if the bank loans out all excess reserves.
16. Suppose that a bank has $100,000 in excess reserves. Assuming that the required reserve ratio is 20%, use t-accounts to illustrate the multiple deposit creation process. Use this to obtain the simple deposit multiplier. Why are the deposit multiplier and the money multiplier the same when there is no currency and when banks loan out all excess reserves?
17. Suppose that the required reserve ratio is 20%, and the monetary base is 1,000. (a) Find the money supply. (b) Let open market operations increase the monetary base by 200. Use the money multiplier to find the new value of the money supply. [Update: This question had a mistake in it - we hadn't covered excess reserves and currency as part of the multiplier yet. It's been fixed.]
