Finals Chapter 13 Flashcards
In a fractional reserve banking system, banks are required
to keep a percentage of their deposits in reserve, then may loan out the rest.
In a fractional reserve banking system, most of the money in the economy is created by
Banks making loans.
Each new loan increases the money supply.
The nominal interest rate is
The money rate of interest
The real rate of interest
Is the nominal rate minus the rate of inflation.
The quantity theory of money ties the money supply
to prices.
- It states that an increase in the money supply will cause an equal increase in the price level.
- Economists agree that this works in the short run for large increases in M, and probably over the long run for any increase in M, but may not be accurate for small increases in M in the short term.
Money is assumed by the quantity theory to be
Neutral, that is it affects prices, but not output.
Because interest rates are tied to the money supply, an increase in the money supply
may lower interest rates, which increases investment and GDP, at least in the short run.
Central banks are the government owned or sponsored banks in countries.
Are the government owned or sponsored banks in the country.
The US central bank is the
Federal Reserve System.
The functions of the central bank are to
1) be a clearing house for checks,
2) regulate the banking system,
3) serve as a bank for bankers,
4) control the money supply and interest rates, and
5) be the lender of last resort.
The Fed controls the money supply by
Buying and selling government bonds.
Buying bonds
Increases the money supply
Selling bonds
Decreases the money supply
The Federal Reserve System
Was created in 1913,
divides the country into 12 districts,
is run by a 7 person Board of Governors and
controls the money supply through an agency called the Federal Open Market Committee.
The quantity theory of money
says that there is a direct relationship between the money supply in the economy and the prices of goods and services.
As the money supply increases, so will the level of prices in the economy.
Velocity
The velocity of money is the average number of times each dollar is used during a given year.
Reserves
In the US, banks are required to hold 12% of most deposits made. This 12% is called the required reserve ratio or reserve reserve requirement.
The bank must keep the 12% either in the bank in cash or on account at the local Federal Reserve Bank.
This money is called the banks reserves.
Required reserve ratio
-In the US, banks are required to hold 12% of most deposits made. This 12% is called the required reserve ratio or reserve reserve requirement.
The bank must keep the 12% either in the bank in cash or on account at the local Federal Reserve Bank.
Board of governors
The Federal Reserve System is controlled by a board of governors located in Washington D.C.
there are 7 people on the board of governors, appointed by the president and approved by the Senate for 14 year terms of office.
District
The country was divided into twelve districts . Each district has a Fed bank and several branches, overseen by a Board of Directors.
Board of directors
The country was divided into twelve districts .
Each district has a Fed bank and several branches, overseen by a Board of Directors.
Federal open market committee
Is the body charged with control of the money supply.
Clearing house
Central banks act as clearing houses for checks.
When the customer of one bank gives a check to a customer of another bank, the central bank facilitates the interaction between the banks.
Bankers bank
Serves as bank for bankers
Lender of last resort
Central banks are the lender of last resort. This means that the central bank is responsible for ensuring that qualified borrowers can always find money to borrow.
Assets
Something you own
Liability
Something you owe
Assets =
Liabilities + Owners Equity
Actual reserves
Total reserves of the bank.
Required reserves
The amount of reserves it must keep in the bank
Excess reserves
Actual reserves - Required reserves
Money multiplier =
1/ required reserves ratio
Equation of Exchange
MV= PQ( =GDP) M is money supply V is velocity of money P is price level of the whole country Q is quantity of output ( Real GDP) produced by the nation.
GDP=
Price times quantity
