Chapter 6- Banking and the Federal Reserve Flashcards

1
Q

What is the money supply?

A

the total quantity of money in the economy at any given time.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Why do economist measure the money supply?

A

to help determine the activity taking place all around us in the economy.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is the definition of M1- money?

A

consists of coins and currency, checking accounts and traveler’s checks

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

what is the definition of M2-money?

A

it is M1 + small savings accounts, money market funds and small time deposits.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is the definition of M3- money?

A

it is M2 + large time deposits, large money market funds and repurchase agreements.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What does liquidity mean?

A

how easy something can be converted into cash.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Which is most liquid?
M1
M2
M3

A

M1, M2 then M3

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Define Money

A

the portion of your wealth that you choose to hold in the form of cash or checking accounts instead of other forms of wealth that may yield an income.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is the demand for money?

A

the relationship between the quantity of money people want to hold and the factors that determine that quantity.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are the basic motives for holding money?

A
  1. transaction demand for money
  2. precautionary demand for money
  3. Speculative demand for money
  4. portfolio demand for money
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is the demand curve for money?

A

An illustration economist use to demonstrate the demand for money.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What type of slope does the demand curve for money have?

A

downward sloping.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What factors lead to a shift in the demand for money curve?

A
Read GDP (+)
Price Level (+)
Expectation (-)
Transfer Costs (+)
Preferences (-)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What year was the federal reserve founded?

A

1913 by the Federal Reserve Act

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Where does the Federal Reserve’s power come from

A

its ability to issue money.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is the main goal of the federal reserve?

A

to promote maximum sustainable output and employment and to promote stable prices.

17
Q

What is the federal reserve responsible for?

A
  1. holding deposits of banks
  2. acting as the lender of last resort to commercial banks
  3. regulating the money supply
  4. supervising the banking system
  5. providing check-clearing services
18
Q

What are the federal reserve’s main objectives?

A
  1. maximum employment
  2. price stability
  3. moderate interest rates
19
Q

How does the federal reserve attempt to achieve it main objectives?

A

Controlling the money supply. when the money supply changes, interest rates also change.

20
Q

Does the federal reserve bank with individuals directly.

A

no.

21
Q

What does an increase in the money supply cause?

A

a lowering of interest rates, higher levels of investment, and greater economic output.

22
Q

What does a decrease in the money supply cause?

A

higher interest rates, lower levels of investments, and lower economic output.

23
Q

When would the federal reserve want to use an expansionary monetary policy?

A

When economic growth is slow, stalled or during a recession or depression.

24
Q

When would the federal reserve want to use a contractionary monetary policy?

A

When inflation rates are too high and the economy is growing too quickly.

25
Q

Define open market operations.

A

the purchases and sales of government securities in the open market by the federal reserve.

26
Q

How does the federal reserve actually increase the money supply?

A

they purchase government bonds from the public on the open market. this increases the money supply.

27
Q

How does the federal reserve actually decrease the money supply?

A

They sell government bonds to the public in the open market. the money used in this exchange get removed form the banking system, so the money supply goes down.

28
Q

What is the money multiplier equation?

A

money multiplier = 1/the reserve ratio rate.

29
Q

What formula is used to calculate the changes in money supply?

A

Change in money supply = changes in reserves * the money multiplier.

30
Q

What is the discount rate?

A

the interest rate charges when member banks borrow directly from the federal reserve.

31
Q

what is the affect of the fed lowering the discount rate?

A

it increases excess reserves in commercial banks throughout the economy and expands the money supply.

32
Q

what is the affect of the fed raising the discount rate?

A

it decreases excess reserves in commercial banks and contracts the money supply.

33
Q

Define commercial banks

A

Also known as depository institutions that accept deposits from businesses and individuals.

34
Q

Define a savings and loan institution

A

those actually owned by its depositors and is focused on providing home loans.

35
Q

Define a credit union

A

a nonprofit institution that is usually formed to serve a specific group of people.

36
Q

Define investment banks.

A

instead of taking in deposits and lending money, investment bankers help companies raise capital through stock offerings. Also help companies with mergers and acquisitions

37
Q

Define international banking

A

can provide the same services to its customers as domestic banks, but also provide additional services. help financing trade through use of letters of credit and export credit. they also provide exchange services so that businesses can make payments in the local currency