1.       What distinguishes money from other assets in the economy?

Money is an asset that is generally accepted as payment for goods and services.

2.       What is commodity money? What is fiat money? Which kind do we use?

Commodity money is, as it says, a commodity.  It has value as the commodity itself (i.e. Salt can be used on food) and it has value as money that is accepted for payment.

3.       What are demand deposits and why should they be included in the stock of money?

Demand deposits are deposits in banks that are available by  withdrawaling or by writing a check.  They should be included as money because they can be used as easily as currency to purchase goods and demand deposits also fulfill the three functions of money.

4.       Who is responsible for setting monetary policy in the United States? How is this group chosen?

Monetary policy is set by the Federal Reserve.  In particular, the Federal Open Market Committee of the Federal Reserve sets policy for the level of our money supply.  The Federal Open Market Committee consists of the Board of Governors who are appointed by the President and confirmed by Senate and a rotating group of Regional Bank President serve also on the committee.

5.       If the Fed wants to increase the money supply with open-market operations, what does it do?

When the Federal Reserve buy bonds on the open market, the money supply will increase.

 8.    What is the discount rate? What happens to the money supply when the Fed raises the discount rate?

The discount rate is the interest rate on a loan from the Federal Reserve to a member bank.  When the Federal Reserve increases the discount rate banks become more cautious and tend to hold extra reserves.  Because banks hold extra reserves, this money will not increase through multiple deposit creation and the money supply will decrease.

9.    What are reserve requirements? What happens to the money supply when the Fed raises reserve requirements?

All banks are required to hold 10% of their checkable deposits as vault cash or in a reserve account at the Federal Reserve.  When the Federal Reserve increase required reserves banks must increase reserves and that money is no longer available to go from bank to bank in multiple deposit creation and, therefore, the money supply will decrease.

10.  Why can’t the Fed control the money supply perfectly?

The multiple deposit creation described in class was a perfect situation where banks loaned out the maximum amount and consumer immediately deposited that full amount in the bank.  The Federal Reserve can not be sure that banks and people behave in that perfect way and, therefore, do not have complete control over the money supply.