Chapter 14: Money, Banking and the Federal reserve System

Question 1

Money

Answer 1

asset that can easily be used to purchased goods/services

Question 2

Currency in circulation

Answer 2

cash held by the public

Question 3

checkable bank deposits

Answer 3

bank accounts on which people can write checks

Question 4

money supply

Answer 4

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

Question 5

Roles of money

Answer 5

• medium of exchange: an asset that people acquire for the purpose of trading rather than for their own consumption; money, by increasing gains from trade, increases welfare.
• store of value: means of holding purchasing power over time
• unit of account: measure used to set prices and make economic calculations

Question 6

Commodity money

Answer 6

Good used as a medium of exchange that has other uses

Question 7

Commodity-backed money

Answer 7

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

Question 8

Flat money

Answer 8

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

Question 9

M1

Answer 9

Consists of assets used to buy groceries: currency, traveler’s checks, and checkable deposits

Question 10

M2

Answer 10

broader, includes savings accounts that can easily and quickly be converted into M1

Question 11

Monetary aggregate

Answer 11

overall measure of money supply

Question 12

Near-Moneys

Answer 12

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

Question 13

Central bank

Answer 13

Institution that oversees and regulates the banking system and controls the monetary base ie Federal Reserve

Question 14

Federal Reserve System

Answer 14

consists of Board of Governors in D.C. and regional Fed Res banks, each serving it’s district (12 of them)

Question 15

Federal funds market

Answer 15

allows banks that fall short of the reserve requirement to borrow funds from banks with excess

Question 16

federal funds rate

Answer 16

interest rate determined in the federal funds market

Question 17

discount rate

Answer 17

rate of interest the Fed charges on loans to banks

Question 18

Assets of Fed Reserve

Answer 18

govt debt ( 90% treasury bills)

Question 19

Liabilities of Fed Reserve

Answer 19

monetary base (currency in circulation + bank reserves)

Question 20

Fed Open market operations

Answer 20

principal tool of monetary policy: *Fed can increase the monetary base by buying govt debt from banks (Treasury bills). This leads to increase in money supply via the money multiplier as banks lend out new reserves.

Fed can reduce the monetary base by selling govt debt to banks (Treasury bills). This leads to a fall in money supply via money multiplier as banks reduce their loans in response to fall in their reserves.

Question 21

Bank

Answer 21

financial intermediary that uses liquid assets in the form of bank deposits to finance the illiquid investments of borrowers

Question 22

T-account

Answer 22

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

Question 23

Bank reserves

Answer 23

currency banks hold in their vaults + deposits at the Fed Reserve

Question 24

Reserve ratio

Answer 24

fraction of bank deposits that a bank holds as reserves

Question 25

bank run

Answer 25

phenomenon in which many of a bank’s depositors try to withdraw their funds due to fears of a bank failure (can be contagious and affect other banks)

Question 26

Deposit insurance

Answer 26

guarantees that a bank’s depositors will be paid even if the bank can’t come up with the $, up to a max/account. The FDIC guarantees the first $250,000 of each account

Question 27

Capital requirements

Answer 27

regulators require that owners of banks hold substantially more assets than the value of bank deposits. In practice, bank’s capital = 7% or > of assets

Question 28

Reserve requirements

Answer 28

rules set by Fed Res that determine the minimum reserve ratio (MRR) for a bank. In US, MRR for checkable bank deposits = 10%

Question 29

Discount window

Answer 29

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

Question 30

Excess reserves

Answer 30

bank reserves over and above its required reserves

Question 31

Monetary base

Answer 31

sum of currency in circulation and bank reserves; each $ of bank reserves backs several $ of bank deposits, so money supply > monetary base

Question 32

money multiplier

Answer 32

ratio of money supply to monetary base

Question 33

Debit cards

Answer 33

automatically transfer funds from the buyer’s bank account; allows access to part of money supply

Question 34

Credit cards

Answer 34

access funds that can be borrowed by the user of card, which creates a liability for the user and therefore not part of money supply

Question 35

objective 2

Answer 35

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