Chapter 13 - Money And Banks Flashcards
Money plays an essential role in…..
Facilitating the continuous series of exchanges that characterizes a market economy
What are the 3 functions of money? How many have to be fulfilled for something to be considered money?
ALL MUST BE FULFILLED TO BE CONSIDERED MONEY
- Medium of exchange
- Store of Value
- Standard of value
Describe “medium of exchange”
It must be accepted as payment for goods and services (and debts)
Describe “store of value”
It can be held for future purposes
Describe “standard of value”
It serves as a “yardstick” for measuring the price of goods and services.
Ex: we all know $100 is an absurd price for a burger
What if purchasing power changes? Can it still be considered money?
YES- purchasing power of money will change with time. But purchasing power doesn’t change the fact that a $20 bill is a $20 bill and will always be
The concept of money includes more than dollar bills and coins. What else is included???
Checking account balances
What is a transactions account?
A bank account that permits direct payments to a 3rd party (with a check or debit card)
Is the balance in your transactions account a form of money? Why or why not?
Yes because the balance substitutes for cash
What is M1?
The abbreviation for the basic money supply
Most money consists of _____ not _____
Most money consists of balances in transaction accounts, NOT cash
M1 (money suppply) includes which 3 things?
- Currency in circulation
- Transaction account balances
- Traveler’s checks
What are traveler’s checks?
Checks that can be used outside the US - not really used much anymore because of credit cards
_______ are a popular medium of exchange, but are NOT a form of money
Credit cards
Why are credit cards not considered a form of money
Because they are a payment service - NOT a store of value
When there is more m1, explain what happens to AD
When M1 goes up, C goes up, and thus AD goes up
What 3 things are all affected by changes in aggregate demand?
Total output
Employment
Prices
Why does the amount of money in the economy matter?
It influences AD
Most of what we call money is _____ not ______
Bank balances, not cash
The ____ and the ____ play only a minor role in the creation of money
Bureau of engraving and printing
Us mint
A bank effectively creates money by…..
Making a loan
Why is a bank making a loan considered to be a creation of money?
Because the bank is increasing the transactions-account balances by giving a loan, and the balances are counted as money
Banks create transactions-account balances by…..
Making loans
When you deposit cash or coins into the bank, you are changing the ______ of the money supply, not its ______
Changing the composition of the money supply not the size
What are BANK RESERVES?
Assets held by a bank to fulfill its deposit obligations
A monopoly bank loans $100 to a company. The total bank reserves have remained unchanged. Explain.
Although total reserves hasn’t changed, what change DID the bank make?
The company will use the loan to buy something from a business. That business will in turn put the money back into the same bank - total reserves did not change
HOWEVER, THE BANK CREATED MONEY BECAUSE THE CHECKING ACCOUNT IT WAS DEPOSITED INTO IS CONSIDERED MONEY
What is the reserve ratio?
Ratio of a bank’s reserves to its total transactions deposits
Do banks reserve all of their transactions deposits?
NO - only a fraction
The ability of a monopoly bank to hold fractional reserves results from 2 facts:
- people use checks for most transactions
- there is no other bank
The minimum reserve requirement directly limits the ability of banks to….
Grant new loans
What are required reserves?
The minimum amount of reserves a bank is required to hold by government regulation
Required reserves =
Required reserve ratio * total deposits
What are excess reserves?
Bank reserves in excess of require reserves
Excess reserves =
Total reserves - required reserves
The ability of banks to make loans depends on access to…..
Excess reserves
So long as a bank has excess reserves, it can….
Make additional loans
We are more concerned with how much excess reserves exist in ____ rather than ____ because…..
We are more concerned with how much excess reserves exist in THE ENTIRE BANKING SYSTEM rather than A SPECIFIC BANK because in reality there is more than one bank in town
The value for money multiplier represents….
The number of loan dollars the bank can create with $1 of excess reserves
Money multiplier =
1/req reserve ratio
Potential deposit creation =
Money multiplier * excess reserves of bank system
Explain the value you get for “total deposit creation” (ex: the value is $100)
This means that $100 total loan CAN be created (doesn’t mean they will)
When required reserve goes up, what happens to the potential deposit creation?
It goes down
Each bank may lend an amount….
Equal to its excess reserve and no more
