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The Fed ____ bonds when it conducts an open-market purchase. This action _____ the money supply.

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What is meant by the term "lender of last resort?" In what circumstances might the Fed be a lender of last resort?

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A "lender of last resort" is a lender to...

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What is the difference between commodity money and fiat money? Why do people accept fiat money in trade for goods and services?

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Commodity money has "intrinsic value," or value in uses other than as money. Fiat money is established as money by the government. It has very little, if any, intrinsic value. Although fiat money has no intrinsic value, people accept it in trade when they are confident that others will also accept it. The government's decree that fiat currency serves as legal tender increases this confidence.

The money multiplier is _____ when the reserve ratio is 12.5 percent.

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Describe the role of the Federal Deposit Insurance Corporation (FDIC).

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The FDIC is the primary mechanism by whi...

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Name three actions the Fed can take to increase the money supply.

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Open-market purchases (buy gov...

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A bank has $1000 in deposits and maintains a 12 percent reserve ratio. Its reserves are $_____.

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What is the Term Auction Facility?

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The Term Auction Facility is the market ...

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What is the difference between money and wealth?

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Money is defined as the set of...

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If you withdraw $500 from your savings account and deposit it in your checking account, then M1 will change by _____ and M2 will change by _____.

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The fractional reserve characteristic of the banking system allows banks to create money and also create wealth from bank deposits.Describe why this statement is or is not true.

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This statement is not true.
Banks can cr...

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Trace the effects on the money supply when the Fed decreases the discount rate.

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The discount rate represents the cost of bank borrowing from the Fed. When the cost of bank borrowing decreases, banks will increase the amount of borrowing which will create additional reserves. The additional reserves mean banks can make more loans. These new loans end up as deposits by people which increases the amount of money in the economy (through the multiplier effect).

What is the change in the money supply when the Fed purchases $700 worth of bonds and the required reserve ratio is 14 percent assuming banks hold no excess reserves?

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Suppose a bank is operating with a leverage ratio of 20.What is the maximum decrease in the market value of assets before the bank becomes insolvent?

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A leverage ratio of 20 implies each perc...

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Why is the president of the New York Fed always a voting member of the FOMC?

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New York is the financial capitol of the...

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A bank operates with reserves of $100,loans of $300 and securities of $100.The bank's only liability is deposits of $400 since it has zero debt.Calculate the bank's leverage ratio.

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Since Assets - Liabilities equals Bank C...

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Draw a simple T-account for First National Bank which has $5,000 of deposits,a required reserve ratio of 10 percent,and excess reserves of $300.Make sure your balance sheet balances.

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When the federal funds rate is below the target rate, the Fed will _____ bonds. This action will _____ the money supply

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The existence of money makes trade easier.How is it that money can also increase the standard of living?

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The existence of money means the economy...

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Are credit cards and debit cards money? What's the difference between credit and debit cards?

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Neither credit cards nor debit cards are...

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