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                 1.Describe the three functions of Money.

The three functions of money are:

a) medium of exchange: deposits in bank accounts from which depositors may make withdrawals by writing checks

b) unit of account: measures prices and value

c)  store of value: a means of holding wealth

                 2.Briefly describe how banks function and how they make a profit.

Banks remain in business by taking on deposits, and giving out loans from those deposits. The interest they receive on those loans has to be higher than the interest they pay on deposits in order to make a profit and continue to operate.

                 3.Briefly explain how banks make money.

In fractional reserve banking, money is deposited and loans are created. Those loans are used and paid to someone, which then puts that money into the bank, and the bank creates more loans. With that initial deposit, the bank has in effect created more money in the financial system.

                  4.Briefly explain the relationship between the Fed and banks.

The federal reserve does the job of controlling the monetary policy, is the central bank of banks, and is in charge of bank regulation.

                  5.Briefly explain the intended effects of Quantitative Easing (not each step, just the process overall).

In quantitative easing, central bank’s target the supply of money by buying or selling government bonds. When the economy stalls and the central bank wants to encourage economic growth, it buys government bonds. This lowers short-term interest rates and increases the money supply. This strategy loses effectiveness when interest rates approach zero, at which point banks have to implement other strategies to kick start the economy.

                   6.Explain why exchange rate fluctuations make goods and services relatively cheaper or more expensive. Exchange rate fluctuates depending on how well the economy is doing in that certain time, if the economy is doing good then goods and services will be more expensive, if the economy is doing bad then it will be cheaper.

For this one question, give a detailed response on it. If you do not understand it, I highly recommend you go back and reread the section. Note, the expectations theory does not fully account for why the Phillips Curve does not work as it is supposed to, but it is one big reason given by the book. Unemployment is determined by many factors.

“Explain the relationship between expectations and increases to the money supply, and why the short-run Philips curve eventually could not account for the relationship between inflation and unemployment.” The Phillips curve relates the rate of inflation with the rate of unemployment. The Phillips curve argues that unemployment and inflation are inversely related: as levels of unemployment decrease, inflation increases. The relationship, however, is not linear. Graphically, the short-run Phillips curve traces an L-shape when the unemployment rate is on the x-axis and the inflation rate is on the y-axis.