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ECON 2301 > Book: Chapter 13 > Flashcards

Book: Chapter 13 Flashcards

1
Q

Federal Open Market Committee

FOMC

A

• The group that decides on monetary policy: it consists of the 7 members of the Board of Governors plus 5 of 12 regional bank presidents on a rotating basis.

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2
Q

Federal Reserve Bank

A

• one of the 12 regional banks that are an official part of the Federal Reserve System

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3
Q

money

A

• any items that are regularly used in economic transactions or exchanges and accepted by buyers and sellers

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4
Q

balance sheet

A

• an account statement for a bank that shows the sources of its funds (liabilities) as well as the uses of its funds (assets)

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5
Q

fiat money

A

• a monetary system in which money has no intrinsic value but is backed by the government

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6
Q

money multiplier

A

• the ratio of the increase in total checking account deposits to an initial cash deposit

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7
Q

barter

A

• the exchange of one good or service for another

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8
Q

gold standard

A

• a monetary system in which gold backs up paper money

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9
Q

owners’ equity

A

• the funds provided to a bank by its owners

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10
Q

Board of Governors of the Federal

Reserve

A

• the seven-person governing body of the Federal Reserve System in Washington DC.

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11
Q

lender of last resort

A

• a central bank is the lender of last resort, all others having failed, from which banks in emergency situations can obtain loans

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12
Q

required reserves

A

• the specific fraction of their deposits that banks are required by law to hold as reserves

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13
Q

liabilities

A

• the sources of funds for a bank, including deposits and owners’ equity

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14
Q

reserve ratio

A

• the ratio of reserves to deposits

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15
Q

central bank

A

• a banker’s bank: an official bank that controls the supply of money in a country

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16
Q

assets

A

• the uses of the funds of a bank, including loans and reserves

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17
Q

reserves

A

• the portion of banks’ deposits set aside in either vault cash or as deposits at the Federal Reserve

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18
Q

commodity money

A

• a monetary system in which the actual money is a commodity, such as gold or silver.

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19
Q

M1

A

• the sum of currency in the hands of the public, demand deposits, other checkable deposits, and traveler’s checks

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20
Q

M2

A

• M1 plus other assets, including deposits in savings and loans accounts and money market mutual funds

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21
Q

store of value

A

• the property of money that holds that money preserves value until it is used in an exchange

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22
Q

double coincidence of wants

A

• the problem in a system of barter that one person may not have what the other desires

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23
Q

medium of exchange

A

• any item that buyers give to sellers when they purchase goods and services

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24
Q

unit of account

A

• a standard unit in which prices can be stated and the value of goods and services can be compared

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25
Q

excess reserves

A

• any additional reserves that a bank holds above required reserves

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26
Q

monetary policy

A

• the range of actions taken by the Federal Reserve to influence the level of GDP or inflation

27
Q

Money solves the problem of double coincidence of wants that would regularly occur under a system of _____.

A

• barter

28
Q

Gold is a good example of commodity money. (True/False)

A

• true

29
Q

Deposits in checking accounts are included in the definition of money because they are a very liquid asset. (True/False)

A

• true

30
Q

The largest component of M2 is deposits in _____.

A

• savings deposits

31
Q

Money market mutual funds are hard to classify in a definition of money because they are only held to facilitate transactions. (True/False)

A

•

32
Q

So much U.S. currency is in global circulation because it is a safe asset compared to assets denominated in foreign currency. (True/False)

A

•

33
Q

Debit Cards. In recent years, debit cards have
become popular. Debit cards allow the holder of
the card to pay a merchant for goods and services
directly from a checking account. How do you think
the introduction of debit cards affected the amount of
currency in the economy? How about the amount of
checking account deposits?

A

•

34
Q

Gift Cards. Gift cards have grown in popularity
as a mechanism to give gifts. Cards are available for
popular bookstores and for coffee shops. Should these
gift cards be considered part of the money supply?
How do they differ from traveler’s checks?

A

•

35
Q

Brazilian Local Money “The capavaris issued
in Brazil can be viewed as a type of gift card for
purchases made locally.” Explain this quote. (Related
to Application 1 on page 276 .)

A

•

36
Q

Credit Cards. Why aren’t traditional credit cards

part of the money supply?

A

•

37
Q

Inflation and Currency Held Abroad. Suppose
inflation in the United States rose to around 7 percent
a year. How do you think this would affect the demand
for U.S. currency by foreigners?

A

•

38
Q

Currency and Underground Economy. Search the
Web for articles on “currency and the underground
economy.” How have various authors used estimates
of currency to measure the underground economy?

A

•

39
Q

Banks are required by law to keep a fraction of their

deposits as _____.

A

•

40
Q

When reserves do not pay interest, banks prefer to

keep reserves rather than make loans. (True/False)

A

•

41
Q

If the reserve ratio is 0.2 and a deposit of $100 is made

into a bank, the bank can lend out _____.

A

•

42
Q

If the reserve ratio is 0.2, the simplified money

multiplier will be _____.

A

•

43
Q

A Bad Trade at a Bank. In 2012, the bank JPMorgan
Chase lost over $2 billion in a bad trade in the market.
What happened to owners’ equity after the trade?
Banks versus Insurance Companies. Both insurance
companies and banks are financial intermediaries. Why
do macroeconomists study banks more intensively
than insurance companies?

A

•

44
Q

Understanding M1 and M2. If you write a check
from your checking account to your money market
account, what happens to M1 and M2?

A

•

45
Q

Cash Withdrawals and Changes in the Money
Supply. If a customer withdrew $2,000 in cash from a
bank and the reserve ratio was 0.2, by how much could
the supply of money eventually be reduced?

A

•

46
Q

Money Market Mutual Funds, Banks, and
Reserves. Money market mutual funds typically
invest in government securities and other financial
instruments that can be easily bought and sold. They
are not subject to reserve requirements and, in fact,
hold minimal reserves. Banks, on the other hand, make loans to businesses for investment purposes. If
there were no reserve requirements for banks, how
do you think their reserve holdings would compare to
money market mutual funds?

A

•

47
Q

Setting the Interest Rate on Reserves. What would
be the danger if the Fed set an interest rate on reserves
close to the market interest rate on loans?

A

•

48
Q

The Federal Reserve is the “_____ of last resort.”

A

•

49
Q

The San Francisco Federal Reserve Bank is the only
one in the West because San Francisco outbid Los
Angeles to be its host. (True/False)

A

•

50
Q

The _____ votes on monetary policy.

A

•

51
Q

_____-year terms help ensure the political

independence of the Board of Governors.

A

•

52
Q

The Fed provides a system of check collection and _____.

A

•

53
Q

The Treasury Secretary and the Fed. Occasionally,
some economists or politicians suggest that the
secretary of the Treasury become a member of the
Federal Open Market Committee. How do you think
this would affect the operation of the Federal Reserve?

A

•

54
Q

Where Should Regional Banks Be Located Today?
Given the changes in the location of economic activity
that have occurred since the founding of the Federal
Reserve, how would the location of the regional banks
change if they were allocated by economic activity?

A

•

55
Q

The President of the New York Federal Reserve
Bank. The president of the New York Federal Reserve
Bank is always a voting member of the Federal Open
Market Committee. Given your understanding of the
conduct of monetary policy, why is this true?

A

•

56
Q

Additional Congressional Oversight? A presidential
candidate in 2012, Ron Paul, has strongly argued
for more accountability and auditing of the Federal
Reserve. What are the pros and cons of more
Congressional oversight of the Fed?

A

•

57
Q

The Federal Reserve arranged for JPMorgan Chase &

Co. to _____ Bear Stearns during the financial crisis in 2008.

A

•

58
Q

The “float” in the banking system is the difference between the Federal Reserve’s _____ and _____ when clearing checks.

A

•

59
Q

Two actions the Fed took after September 11, 2001, to

ensure the financial system operated smoothly were _____ and _____.

A

•

60
Q

Required Reserves during the Great Depression.
During the Great Depression, banks held excess
reserves because they were concerned depositors
might be more inclined to withdraw funds from their
accounts. At one point, the Fed became concerned
that excess reserves were too high and raised the
reserve requirements for banks.
a. Assuming banks were holding excess reserves for
precautionary purposes, do you think they would
continue to want to hold them even after reserve
requirements were raised? Explain.
b. What do you think happened to the money supply
after the Fed raised reserve requirements?

A

•

61
Q

Crisis in the Short-Term Credit Market. In 1973,
several major companies went bankrupt and were not
going to be able to pay interest on their short-term
loans. This caused a crisis in the market. There was
concern that the short-term credit market would
collapse, and that even healthy corporations would not
be able to borrow. How do you think the Fed should
have handled that situation?

A

•

62
Q

The Federal Reserve Loan to JPMorgan Chase &
Co. When the Federal Reserve makes a loan to a bank
or financial institution, it requires the institution to
specify certain assets the Federal Reserve can take
possession of if the loan is not repaid. These assets
are known as collateral. When the Federal Reserve
made its $30 billion loan to JPMorgan, it allowed
JPMorgan to use some of the assets of Bear Stearns
as collateral. Why was this risky for the Federal
Reserve and a good deal for JPMorgan? (Related to
Application 4 on page 285 .)

A

•

63
Q

Check Clearing and September 11. How did
the Federal Reserve manipulate the check- clearing
process to increase liquidity in response to the
potential financial crisis following the terrorist attacks
of September 11, 2001? (Related to Application 3 on
page 284 .)

A

•

64
Q

Bailouts? Some critics of the Fed’s actions with AIG
and Bear Stearns said that the government was just
bailing out failing financial firms that should have
been allowed to fail. It is true that owners of both
firms did benefit from these actions. Nonetheless,
can you defend the Fed? (Related to Application 4 on
page 285 .)

A

•

ECON 2301 (19 decks)

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