ECON 202 MIDTERM 3 Chapters 13, 14, 15, 16Chapter 13 – Money, Banks, and the Federal ReservePop quiz questions:1.When money is used to compare the costs of different goods and services, it is functioning as A UNIT OF ACCOUNT.2.If the required reserve ratio is 0.2, what is the demand deposit multiplier? 5.0.3.Which of the following would lead to a decrease in the money supply? THE FED SELLS GOVERNMENT BONDS.Monetary system:Unit of account: common unit for measuring how much something is worth; allows costs of different goods to be compared.Dollar: US unit of value; centerpiece of monetary system.Money: any asset that is widely acceptable as means of payment.Means of payment: Anything acceptable as payment for goods and services.History of the dollar:Each colony had its own currency until 1790 when dollar became standard unit of value. Until civil war and after 1879, means of payment was paper currency issued by banks.Federal reserve system(1913) – monetary authority, creates and regulates the nation’s supply of money, paper currency issued by banks no longer means of payment.Commodity money: furs, jewels, and precious metals.Paper currency.Fiat money: government declaration as a valid means of payment.Money: asset (store of value), widely accepted as a means of payment, unit of account.Money supply: total amount of money held by the public.Liquid asset: can be converted to cash quickly, at little cost.Illiquid asset: can be converted to cash after a delay, or at a considerable cost.M1: standard measure of the money stock – cash in the hands of the public, demand deposits, other checkable deposits, travelers checks. In 2009, this amounted to $1664 billion ($858 + $801 + $5).Money supply= cash in the hands of the public + demand depositsM2: savings-type accounts, retail money market mutual funds (MMMF), certificates of deposits (CDs). In 2009, M2 = $8 trillion.Financial intermediary: specializes in brokering between savers and borrowers (commercial banks, savings and loans, mutual savings banks, credit unions). Depository institutions accept deposits from general public and lend deposits to borrowers.Commercial bank: private corporation owned by its stockholders that provides services to the public (checking accounts).A bank’s balance sheet – financial statement:Assets: what the bank owns.Liabilities: what the bank owesNet worth= total assets – total liabilitiesBond: promise to pay back borrowed funds, issued by corporation/government agency.Loan: agreement to pay back borrowed funds, signed by household or noncorporate business.Banks are required by law to hold reserves: vault cash plus balances held at the Fed.Required reserves: minimum amount of reserves a bank must hold, depend on the amount of deposit liabilities.Required reserve ration (RRR).Central bank: a nation’s principal monetary authority, responsible for controlling the money supply, created in 1913. Suspicion of central authority and concern of regional favoritism delayed creation of bank.