Chapter 14: Money and Banking Flashcards
In the history of the world, what item was used for money over the broadest geographic area and for the longest period of time?
Cowrie shells
Durable, measurable in either quantity or weight, impossible to counterfeit, controlled but not scarce
Main goals of Macroeconomics
- Low unemployment
- Economic growth
- Low inflation
Monetary Policy
Manipulation of interest rates and credit conditions by a nation’s central bank. Reduced interest rates and increased available credit > increased business investment and consumer spending > growing GPD and employment
Fiscal Policy
Policy on government spending, taxes, and borrowing
Purposes of Money
- Medium of exchange (not stuck in barter system)
- Store of value (nonperishable)
- Unit of account (standardized metric)
- Serves as standard of deferred payment (allows for loans)
Are we on the Gold Standard?
No, we went off the gold standard in the 1930s. Money is about confidence now.
US Central Bank
Federal Reserve
The Fed
European main bank
European Central Bank / ECB
In the US, does the Fed have the power to tell banks what interest rates to charge?
No, so instead the Fed manipulates interest rates by changing the money supply (increase $ supply = more money for banks to loan out, lowering interest rates > increase borrowing and spending)
How does the Fed increase money supply?
- Decreasing the reserve requirement that banks are required to hold in reserves (frees up money)
- Change interest rate (called the discount rate) the Fed charges banks
- Open Market Operations - Fed buys or sells short term government bonds to banks. Buying back bonds from banks increases banks’ money supply. This is the most commonly used method.
Why has inflation not increased even though the Fed increased the money supply around 2009?
Multiple explanations.
- Excess Reserves - banks increased their reserves, so money never made it into the market/system.
- Uncertainty in Europe, causing foreigners to hold dollars
- US economy is still struggling
Barter
Trading one good or service for another. Inefficient to coordinate.
Double Coincidence of Wants
Situation in which two people each want some good or service that the other person can provide
Problems with Barter
- Inefficient to coordinate (double coincidence of wants)
- Does not allow us to enter into future contracts for purchase (perishable items)
- Ok in small economies, but does not allow for growth
Medium of Exchange
Created by money, which acts as intermediary between buyer and seller
Fiat Money
Has no intrinsic value, but is declared by a government to be the legal tender of a country
(example: US paper money)
How is money defined?
Based on liquidity - how quickly can it be used to buy a good or service?
M1 Money Supply
Very liquid monies such as cash, checkable deposits, and traveler’s checks
M2 Money Supply
Includes everything in M1, but also less liquid monies such as savings and time deposits, certificates of deposit, and money market funds
Which of the following is considered money?
a. checkable deposits
b. debit card
c. paper check
a. checkable deposits
Where is most money in the economy?
In bank accounts, which exist only as electronic records on computers
What functions do banks provide?
- Act as financial intermediary, bringing together savers and borrowers
- Play a key role in the creation of money
- Lower transaction costs of finding a lender or borrower
Depository Institutions
Institutions that accept money deposits and then use these to make loans. All deposited funds are mingled in one big pool, which is then loaned out.
Credit Unions
Nonprofit financial institution that its members own and run. Accepts deposits from members and focuses on making loans back to its members. More credit unions than banks in the US.