Chapter 15 Flashcards
What power does the Federal Reserve have to do?
The power to create money
Who maintains the bank account of the US Treasur?
The Fed
What are the most important assets that serve as means of payment in the US today?
- Currency
- Total reserves held by banks at the Fed
- Checkable deposits- your checking or debit account
- Savings, deposits, money market mutual funds, and small time deposits
What is a liquid asset?
an asset that can be used for payments or quickly and without loss of value, be converted into an asset that can used for payments
What is the most liquid asset?
Currency since it can be spent almost anywhere
What are the 3 most important definitions of the money supply?
- The monetary base
- M1
- M2
What is the monetary base?
Currency and total reserves held at the Fed
What is M1?
Currency plus checkable deposits
What is M2?
M1 plus savings deposits, money market mutual funds, and small time deposits
All major banks have accounts at the…
Federal Reserve
What is fractional reserve banking?
A system where banks hold only a
fraction of deposits in reserve, lending
the rest.
How do banks earn profit on the money that they hold for you?
They keep some of the money in the bank and loan the rest, charging a higher interest rate
What is the reserve ratio?
The ratio of reserves to deposits.
What is the money multiplier?
The amount the money supply expands
with each dollar increase in reserves.
MM = 1/RR.
What is the reserve ratio primarily determined by?
How liquid the banks wish to be
What kind of institution is the Fed?
quasi-independent filled with checks and balances to insulate it from political pressures
How many members are on the board of governors in the Fed? Who are they appointed by? How many years are they appointed for?
7, President and confirmed by the Senate, 14 years
What does the Federal Open Market Committee do?
Determine the stance of monetary policy
What are the 3 tools the Fed uses to influence the money supply?
- Open market operations
- Discount rate lending and the term auction facility
- Paying interest on reserves held by banks at the Fed
What is an open market operation?
The Fed buys and sells government bonds(usually T-bills) to change the money supply?
If the Fed wants to increase the money supply it..
buys T-bills
If the Fed wants to decrease the money supply it..
sells T-bills
When the Fed is buying bonds(expansionary monetary policy) what does this do to the interest rate?
It pushes them down and increases the demand for bonds(bond prices increase)
When the Fed is selling bonds(contractionary monetary policy) what does this do to the interest rates?
It pushes the interest rates up and increases the supply of bonds(bond prices decrease)
What is quantitative easing?
Situation that occurs when the Fed buys longer term government bonds or other securities
Selling bonds reduces the..
money supply
An open market sale of bonds effectively slows…
the economy
What is quantitative tightening?
When the Fed sells longer-term
government bonds or other securities.
Why is the Fed the lender of last resort?
Because it can create money by increasing reserve accounts
What is the discount rate?
The interest rate banks pay when they borrow directly from the Fed at the discount window
What is monetary policy?
When the Fed uses tools available to motivate changes in AD
What is systemic risk?
the risk that the failure of one financial institution can bring down other institutions as well
What is moral hazard?
the idea that people who are insulated from risk will tend to take on more risk
