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Econ 102 > Chapter 14 > Flashcards

Chapter 14 Flashcards

1
Q

Money

A

any asset that can easily be used to purchse goods and services

-cash itself and other highly liquid assets

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2
Q

currency in circulation

A

cash held by the public

(money)

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3
Q

checkable bank deposits

A

are bank accounts on which people can write checks

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4
Q

money supply

A

total value of financial assets in teh economy that are considered money

  • 2 definitions
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5
Q

double coincidence of wants

A

two parties can trade only when each wants what the other has to offer

-in barter system (money fixes this)

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6
Q

Roles of money

A
  1. medium of exhange
  2. store of value
  3. unit of account
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7
Q

store of value

A

money holds its purchasing power over time

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8
Q

unit of account

A

a meausre used to set prices and make economic calculations

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9
Q

commodity money

A

a good used as a medium of exchange that has intrinsic value in other uses

ex: gold or silver

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10
Q

commodity-backed money

A

medium of exchange with no intrinsic value who ultimate value is gaurunteed by a promise that it can be converted into valuable goods

ex: paper money that was backed by gold
- ties up fewer valuable resources

(only had to keep enough gold on hand to satisfy demand for redemption)

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11
Q

fiat money

A

a medium of exchange whose value derives entirely from its official status as a means of payment

ex: US dollar

advantages:

  • even more of a “wagon way through the air” - doesnt use up real resources
  • supply of money can be adjusted based on the needs of the economy

risks:

-counterfeiting

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12
Q

monetary aggregate

A

an overall measure of the money supply

  • M1 and M2
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13
Q

M1

A

contains only currency in circulation (cash), traveler’s checks, and checkable bank deposits

  • most liquid measure
  • about half is currency in circulation
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14
Q

M2

A

M1 + near-moneys (time deposits, CDs, davings deposits, Money market funds)

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15
Q

near-moneys

A

financial assets that can’t be directly used as a medium of exchange but can be readily converted into cash or checkable bank deposits

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16
Q

bank reserves

A

currency banks hold in their vaults plus thier deposits at the Federal Reserve

  • fed reserve deposits can be converted into currency almost instantly
  • NOT part of currency in circulation
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17
Q

T-account

A

a tool for analyzing a business’s financial position by showing, in a single table, the business’s assets (left) and liabilities (right)

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18
Q

banks t-account

A

assets = loans, reserves (in either bank’s valut or the Federal reserve)

Liabilities = deposits

*assets MUST > liabilities (certain %)

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19
Q

reserve ratio

A

the fraction of bank deposits that a bank holds in reserves

-Fed sets a minimum required ratio for banks

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20
Q

bank run

A

many of banks depositers try to withdraw their funds due to fears of bank failure

-often contagious

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21
Q

System designed to protect depositors and the economy as a whole against bank runs

A
  1. deposit insurance
  2. capital requirements
  3. reserve ratios
  4. disocunt window
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22
Q

deposit insurance

A

gaurantees that a bank’s depositors will be paid even if the bank can’t come up with the funds, up to a maximum amount per account

  • provided by FDIC (federal deposit insurance corp.)
  • $250,000 per depositor, per bank
  • assurance prevents bank runs
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23
Q

capital requirements

A
  • to reduce the incentive for banks to make risky loans/behaviors, regulators require that the owners of banks hold substaintially more assets than the value of the bank deposits
  • if loans go bad, losses will accrue against the bank and not the gov.

*banks capital is required to equal at least 7% of the value of their assets

24
Q

resesrve requirements

A

rules set by the fed that determine the minimum reserve ratio for banks

  • 10% in US
25
Q

Discount window

A

an arrangement in which the Fed stands ready to lend money to banks in trouble

26
Q

money supply without banks

A

money supply would equal currency in circulation

27
Q

banks affect the money supply in two ways:

A
  1. remove some currency from circulation
  2. create money by accepting deposits and making loans — increase money supply
28
Q

excess reserves

A

a bank’s reserves over and above its required reserves

29
Q

“leaks” in banking system

A

when a bank loans money, some of the the loaned funds may be held by borrowers and not deposited in a bank, so some of the loaned amount “leaks” out

  • and reduces the size of the money multiplier
  • due to consumers keeping funds in currency
30
Q

To define the money multiplier in practice:

A

-Federal Reserve controls the sum of bank reserves and currency in circulation, called the monetary base, but it does not control the allocation of that sum between bank reserves and currency in circuation

31
Q

monetary base

A

the sum of currency in circulation and bank reserves

  • quantity moneary authorities control
  • about 90% currency in circulation
32
Q

differences between monetary base and money supply

A
  1. bank reserves = part of the monetary base but NOT the money supply
  2. checkable bank deposits = part of the money supply but NOT the monetary base
33
Q

money multiplier

A

the ratio of the money supply to the monetary base

-in US it usually fluctuates between 3 and 1.5

(during recssion it was .7)

-small value results because people hold cash on hand

34
Q

central bank

A

an instituttion that oversees and regulates the banking system and controls the monetary base

ex: federal reserve

35
Q

structure of the Fed

A
  • 2 parts: Board of Governors & 12 regional federal reserve banks
  • not government but also not private
  • Board of Governors: 7 members appointed by president, 14 year terms, chairman appointed every 4 years (but usually longer)
  • 12 banks: audit private sector banks
  • Federal Resrve Bank of NY: carries out open-market operations
  • Federal Open market comittee –> BOG + 5 regional bank presidents (always preseident of fed NY) –> make decisions about monetary policy
36
Q

Fed’s three main policy tools

A
  1. reserve requirements
  2. discount rate
  3. open market operations
37
Q

federal funds market

A

allows banks that fall short of the reserve requirement to borrow funds from banks with excess reserves (usually just overnight)

-if bank has insufficient reserves to meet fed’s requirement, it can borrow reserves from other banks

38
Q

federal funds rate

A

the interest rate determined in the federal funds market

39
Q

discount rate

A

the rate of interest the fed charges on loans to banks

  • when banks borrow from the fed itself (via the discount window)
  • usually 1% above federal funds rate to discourage banks from turning to the fed for reserves
40
Q

fed can alter the money supply by:

A
  • changing reserve requirements
  • changing the discount rate

(or both)

  • using open market operations ***uses this one the most if not always***
41
Q

T-account for the fed

A

assets: Government debt (treasury bills)
liabilities: currency in circulation and bank reserves (the monetay base)

42
Q

open-market operation

A

a purchase or sale of government debt (t-bills) by the fed

  • done through commercial banks
  • never done directly through the federal government

*the change in reverse doesnt directly effect the money supply, but it starts the money multiplier in motion

43
Q

The European Central Bank

A
  • ECB
  • very similart to the fed - its the equivalent to the Board of Governors of the Fed
  • then has national central banks in Europe
  • works for the eurozone
  • EBC has Governing Council (like Federal Open Market Committee)
44
Q

Banking Crisis in US in 20th Century

A
  • Fed was created in 1913
  • before this, US used national banks system –> money supply was not responsive
  • Panic of 1907–> trusts were risky with investments –> eventaully trusts failed
45
Q

Creation of the Fed after 1907 crisis

A
  • fed created in 1913
  • fed got the sole right to issue currency
  • however, still potential for bank runs
46
Q

Glass-Steagall Act of 1933

A

separated banks into two categories:

commercial banks

investment banks

– investment banks were less regulated

  • adopted federal deposit insurance
47
Q

comercial bank

A

accepts deposits and is covered by deposit insurance

48
Q

investment bank

A

trades financial assets and is not covered by deposit insurance

49
Q

savings and loan (thrift)

A

another type of deposit-taking bank, usually specialized in issuing home loans

50
Q

Savings and Loan Crisis of 1980s

A
  • S&Ls were covered by federal deposit insurance and tightly regulated
  • congress eased regulations on S&Ls –> had less oversight than banks
  • took on risky investments –> began to fail
  • then congress put in more oversight on S&L activities and sold most to fannie mae and freddie mac
  • led to recession of early 90s
51
Q

2008 Financial Crisis

A
  • LTCM (long term capital management) – used leverage to invest–> involved in derivatives –> eventually people demanded their money and it collapsed –> risky for the whole system due to the balance sheet effect -> Fed bailed them out
  • subprime lending
  • housing bubble
52
Q

leverage

A

financial institution engages in leverage when it finances its investments with borrowed funds

53
Q

balance sheet effect

A

the reduction in a firm’s net worth due to falling asset prices

54
Q

vicious cycle of deleveraging

A

takes place when asset sales to cover losses produce negative balance sheet effects on other firms and force creditors to call in their loans, forcing sales of more assets and cauing further declines in asset prices

55
Q

subprime lending

A

lending to home-buyers who dont meet the usual criteria for being able to afford their payments

  • led to 2008 recession
  • happened because housing prices were rising
56
Q

securitization

A

a pool of loans is assmebled and shares of that pool are sold to investors

  • home loans were made and then the mortgages were sold to other investors
57
Q

Crisis & Response

A

Crisis:

  • deleveraging
  • credit crunch
  • hard to borrow

Response:

  • US Treasury injected capital into banks
  • Dodd Frank Financial Reform bill (wall street reform and consumer protection act) –> created bureau of consumer financial protection–> more transparent, could determine “important” institutions to regulate

Econ 102 (6 decks)

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