AP Macroeconomics Flashcards: Banking And Expansion Of Money Supply

What this deck covers

This deck focuses on Banking And Expansion Of Money Supply, giving you a quick way to review the definitions, rules, and examples that matter most for AP Macroeconomics.

How to use these flashcards

Work through these flashcards in short sessions. Try to answer each prompt before flipping the card, then revisit any cards you miss until the explanation feels automatic.

Flashcard 1: What effect does a lower discount rate have on the economy?

Answer: It encourages borrowing and increases the money supply. Cheaper borrowing costs stimulate lending and economic activity.

Flashcard 2: What is the role of the reserve requirement in banking?

Answer: To ensure banks have sufficient reserves to meet withdrawal demands. Prevents bank failures by maintaining adequate cash reserves.

Flashcard 3: Explain an expansionary monetary policy.

Answer: Policy aimed at increasing the money supply to stimulate the economy. Lower rates and more money supply boost economic growth.

Flashcard 4: State the formula for the money multiplier.

Answer: $\frac{1}{\text{Reserve Ratio}}$. One divided by the reserve ratio determines money creation potential.

Flashcard 5: How does increasing the federal funds rate affect the money supply?

Answer: It decreases the money supply. Higher rates discourage borrowing and reduce lending.

Flashcard 6: What is the relationship between the money supply and interest rates?

Answer: An inverse relationship; as one increases, the other typically decreases. More money typically leads to lower interest rates.

Flashcard 7: What is the primary goal of open market operations?

Answer: To control the money supply and interest rates. Fed's main tool for implementing monetary policy decisions.

Flashcard 8: What happens to the money supply if the central bank buys bonds?

Answer: The money supply increases. Bond purchases inject cash into the banking system.

Flashcard 9: What happens if the reserve ratio increases?

Answer: The money supply decreases. Higher ratios require more reserves, reducing lending capacity.

Flashcard 10: Which tool can the central bank use to combat inflation?

Answer: Raising the reserve requirement or interest rates. Both tools reduce money supply to control price increases.

Flashcard 11: What is a contractionary monetary policy?

Answer: Policy aimed at decreasing the money supply to control inflation. Reduces money supply to prevent excessive inflation.

Flashcard 12: What is the primary function of a central bank?

Answer: To manage a nation's monetary policy and regulate banks. Central banks oversee monetary policy and supervise commercial banks.

Flashcard 13: What is a 'checkable deposit'?

Answer: Deposits in bank accounts from which money can be withdrawn via checks. Also called demand deposits, immediately accessible for transactions.

Flashcard 14: What effect does a lower discount rate have on the economy?

Answer: It encourages borrowing and increases the money supply. Cheaper borrowing costs stimulate lending and economic activity.

Flashcard 15: Define 'money supply'.

Answer: The total amount of monetary assets available in an economy. Includes all forms of money circulating in the economy.

Flashcard 16: Define 'monetary base'.

Answer: Currency in circulation plus reserves held by banks. The foundation for all money creation in the economy.

Flashcard 17: What is 'seigniorage'?

Answer: The profit made by the government by issuing currency. Revenue from creating money at low cost but high face value.

Flashcard 18: Identify the effect of an increase in the money multiplier.

Answer: The money supply increases. Higher multipliers create more money from each deposit.

Flashcard 19: Identify the role of the Federal Reserve.

Answer: To control the money supply and maintain financial stability. The U.S. central bank implements monetary policy.

Flashcard 20: Which tool can the central bank use to combat inflation?

Answer: Raising the reserve requirement or interest rates. Both tools reduce money supply to control price increases.

Flashcard 21: Define 'fractional reserve banking'.

Answer: Banks hold a fraction of deposits as reserves and loan out the rest. Allows banks to create money through lending excess reserves.

Flashcard 22: How does increasing the federal funds rate affect the money supply?

Answer: It decreases the money supply. Higher rates discourage borrowing and reduce lending.

Flashcard 23: Identify the role of the Federal Reserve.

Answer: To control the money supply and maintain financial stability. The U.S. central bank implements monetary policy.

Flashcard 24: How does an open market operation affect the money supply?

Answer: Buying securities increases, selling decreases the money supply. Fed purchases inject money; sales remove money from circulation.

Flashcard 25: What is 'seigniorage'?

Answer: The profit made by the government by issuing currency. Revenue from creating money at low cost but high face value.

Flashcard 26: What is the impact of selling government securities?

Answer: Decreases the money supply. Sales remove money from banks, reducing lending capacity.

Flashcard 27: Define 'bank run'.

Answer: A scenario where many depositors withdraw their money simultaneously. Mass withdrawals can cause bank failures and financial panic.

Flashcard 28: What is the federal funds rate?

Answer: The interest rate at which banks lend reserves to each other overnight. The target rate for interbank lending affects all interest rates.

Flashcard 29: Identify the effect of an increase in the money multiplier.

Answer: The money supply increases. Higher multipliers create more money from each deposit.

Flashcard 30: Explain the 'lender of last resort' function.

Answer: The central bank provides funds to banks during financial distress. Emergency lending prevents banking system collapse.

Flashcard 31: What happens to the money supply if the central bank buys bonds?

Answer: The money supply increases. Bond purchases inject cash into the banking system.

Flashcard 32: What is a contractionary monetary policy?

Answer: Policy aimed at decreasing the money supply to control inflation. Reduces money supply to prevent excessive inflation.

Flashcard 33: What is the reserve requirement?

Answer: The percentage of deposits banks must hold in reserve. Set by the central bank to ensure bank liquidity.

Flashcard 34: What is the primary goal of monetary policy?

Answer: To achieve and maintain price stability and full employment. Balancing employment and inflation through monetary tools.

Flashcard 35: What is the effect of a central bank decreasing the reserve ratio?

Answer: Increases the money supply. Lower ratios allow banks to lend more freely.

Flashcard 36: What is the discount rate?

Answer: The interest rate the Federal Reserve charges on loans to banks. Lower rates encourage borrowing and increase money supply.

Flashcard 37: What does 'M1' consist of?

Answer: Currency, demand deposits, and other liquid assets. The most liquid measure of money supply.

Flashcard 38: How does the central bank influence the money supply through reserve requirements?

Answer: By increasing or decreasing the reserve ratio. Higher ratios reduce lending; lower ratios increase it.

Flashcard 39: What is a 'checkable deposit'?

Answer: Deposits in bank accounts from which money can be withdrawn via checks. Also called demand deposits, immediately accessible for transactions.

Flashcard 40: Define 'fractional reserve banking'.

Answer: Banks hold a fraction of deposits as reserves and loan out the rest. Allows banks to create money through lending excess reserves.

Flashcard 41: Explain an expansionary monetary policy.

Answer: Policy aimed at increasing the money supply to stimulate the economy. Lower rates and more money supply boost economic growth.

Flashcard 42: What is a 'certificate of deposit' (CD)?

Answer: A savings certificate with a fixed maturity date and interest rate. A time deposit with penalty for early withdrawal.

Flashcard 43: How does an open market operation affect the money supply?

Answer: Buying securities increases, selling decreases the money supply. Fed purchases inject money; sales remove money from circulation.

Flashcard 44: Which of the following is not part of the money supply: bonds, currency, deposits?

Answer: Bonds. Bonds are investments, not immediate spending power.

Flashcard 45: Define 'bank run'.

Answer: A scenario where many depositors withdraw their money simultaneously. Mass withdrawals can cause bank failures and financial panic.

Flashcard 46: What is the effect of a central bank decreasing the reserve ratio?

Answer: Increases the money supply. Lower ratios allow banks to lend more freely.

Flashcard 47: What is quantitative easing?

Answer: The purchase of long-term securities to increase the money supply. Unconventional policy when standard tools reach their limits.

Flashcard 48: Explain the 'lender of last resort' function.

Answer: The central bank provides funds to banks during financial distress. Emergency lending prevents banking system collapse.

Flashcard 49: What is the primary function of a central bank?

Answer: To manage a nation's monetary policy and regulate banks. Central banks oversee monetary policy and supervise commercial banks.

Flashcard 50: What is the impact of raising the reserve requirement?

Answer: It decreases the money supply. Higher requirements reduce bank lending capacity.

Flashcard 51: How does a reduction in the discount rate affect banks?

Answer: Encourages banks to borrow more and lend more, increasing money supply. Cheaper Fed lending promotes bank lending to customers.

Flashcard 52: What is the discount rate?

Answer: The interest rate the Federal Reserve charges on loans to banks. Lower rates encourage borrowing and increase money supply.

Flashcard 53: What happens if the reserve ratio increases?

Answer: The money supply decreases. Higher ratios require more reserves, reducing lending capacity.

Flashcard 54: Define 'monetary base'.

Answer: Currency in circulation plus reserves held by banks. The foundation for all money creation in the economy.

Flashcard 55: Define 'liquidity'.

Answer: The ease with which an asset can be converted into cash. How quickly assets can become spendable cash.

Flashcard 56: What does 'M1' consist of?

Answer: Currency, demand deposits, and other liquid assets. The most liquid measure of money supply.

Flashcard 57: What is the federal funds rate?

Answer: The interest rate at which banks lend reserves to each other overnight. The target rate for interbank lending affects all interest rates.

Flashcard 58: What is 'M2' in the context of money supply?

Answer: M1 plus savings deposits, small time deposits, and money market funds. A broader money supply measure including less liquid assets.

Flashcard 59: Define 'money supply'.

Answer: The total amount of monetary assets available in an economy. Includes all forms of money circulating in the economy.

Flashcard 60: What is a 'certificate of deposit' (CD)?

Answer: A savings certificate with a fixed maturity date and interest rate. A time deposit with penalty for early withdrawal.

Flashcard 61: What is the impact of raising the reserve requirement?

Answer: It decreases the money supply. Higher requirements reduce bank lending capacity.

Flashcard 62: What is the primary goal of open market operations?

Answer: To control the money supply and interest rates. Fed's main tool for implementing monetary policy decisions.

Flashcard 63: What is the impact of selling government securities?

Answer: Decreases the money supply. Sales remove money from banks, reducing lending capacity.

Flashcard 64: What is 'M2' in the context of money supply?

Answer: M1 plus savings deposits, small time deposits, and money market funds. A broader money supply measure including less liquid assets.

Flashcard 65: State the formula for the money multiplier.

Answer: $\frac{1}{\text{Reserve Ratio}}$. One divided by the reserve ratio determines money creation potential.

Flashcard 66: Define 'fiat money'.

Answer: Currency that has value because of government decree, not intrinsic value. Value comes from government backing, not gold or silver.

Flashcard 67: How does the central bank influence the money supply through reserve requirements?

Answer: By increasing or decreasing the reserve ratio. Higher ratios reduce lending; lower ratios increase it.

Flashcard 68: What is quantitative easing?

Answer: The purchase of long-term securities to increase the money supply. Unconventional policy when standard tools reach their limits.

Flashcard 69: How does a reduction in the discount rate affect banks?

Answer: Encourages banks to borrow more and lend more, increasing money supply. Cheaper Fed lending promotes bank lending to customers.

Flashcard 70: What is the relationship between the money supply and interest rates?

Answer: An inverse relationship; as one increases, the other typically decreases. More money typically leads to lower interest rates.

Flashcard 71: What is the role of the reserve requirement in banking?

Answer: To ensure banks have sufficient reserves to meet withdrawal demands. Prevents bank failures by maintaining adequate cash reserves.

Flashcard 72: Define 'liquidity'.

Answer: The ease with which an asset can be converted into cash. How quickly assets can become spendable cash.

Flashcard 73: Which of the following is not part of the money supply: bonds, currency, deposits?

Answer: Bonds. Bonds are investments, not immediate spending power.

Flashcard 74: Define 'fiat money'.

Answer: Currency that has value because of government decree, not intrinsic value. Value comes from government backing, not gold or silver.

Flashcard 75: What is the reserve requirement?

Answer: The percentage of deposits banks must hold in reserve. Set by the central bank to ensure bank liquidity.

Flashcard 76: What is the primary goal of monetary policy?

Answer: To achieve and maintain price stability and full employment. Balancing employment and inflation through monetary tools.