Monetary and Fiscal Policy Review

The function of money as a Unit of Account means:

• Money is used to measure and compare the value of goods and services. For example, a car is priced at $20,000.

• Money is used to store value for future use.

• Money is used to facilitate the exchange of goods and services.

• Money is used as a standard of deferred payment.

The function of money that allows it to be saved and used in the future is called:

• Medium of Exchange

• Store of Value

• Unit of Account

• Standard of Deferred Payment

Define the following component of the Equation of Exchange: M.

• Money supply

• Market demand

• Marginal cost

• Monetary policy

Define the following component of the Equation of Exchange: P.

• Price level

• Quantity of money

• Velocity of money

• Real output

Economists use the equation of exchange to measure the health of the economy by:

• Tracking the relationship between money supply, velocity, price level, and output.

• Comparing government spending to tax revenue.

• Analyzing only the unemployment rate.

• Focusing solely on international trade balances.

The Fractional Reserve Banking System is:

• A system where banks keep only a fraction of deposits as reserves and lend out the rest.

• A system where banks keep all deposits in their vaults.

• A system where banks do not accept deposits.

• A system where banks only lend to the government.

Excess reserves refer to the amount of money banks hold over the required reserve, which can be loaned out to create new money. Which of the following is an example of this process?

• A bank lends out money from its excess reserves, increasing the money supply.

• A bank holds all its deposits in its vaults and does not lend any money.

• A bank invests in government bonds using its required reserves.

• A bank uses customer deposits to pay for its operating expenses.

Define and provide an example of the following way banks create money: Reserve Ratio.

• Banks create money by lending a portion of deposits, keeping only a fraction as reserves. For example, with a 10% reserve ratio, a $1,000 deposit allows $900 to be lent out.

• Banks create money by printing more currency directly.

• Banks create money by increasing interest rates.

• Banks create money by reducing the amount of loans given.

Banks can increase the money supply by:

• Raising interest rates

• Making more loans

• Reducing reserve requirements

• Selling government bonds

What tools does the Federal Reserve use to influence the economy?

• Reserve requirements, and interest on reserves

• Taxation, government spending, subsidies, and tariffs

• Stock market regulation, bond issuance, currency printing, and gold reserves

• Trade agreements, minimum wage laws, environmental regulations, and antitrust policies