Lectures 19 and 21 Flashcards
What is money?
A (near) perfectly liquid asset
What are the functions of money?
Medium of exchange
Unit of Account
Store of value
Standard of deferred payment
What function of money solves the “double coincidences of wants” problem?
Medium of Exchange
What does unit of account mean?
A common belief as to what a dollar is worth
What does the store of value mean?
The ability to save the value and spend it at a later time
What does the money supply refer to?
to the total amount of money in circulation
What are the two measures of the money supply?
M1 and M2
What is included in M1?
Cash and coins
Checking account deposits
Travelers’ checks
What does the M1 measure of supply need to be?
perfectly spendable
What is the smallest measure of the money supply?
M1 measure of money supply
What is in the M2 measure of the money supply?
Everything in M1
Savings account deposits
Time deposits
Money market mutual funds
What are the depository institutions?
commercial banks
credit unions
savings banks
What kind of banking do commercial banks use?
Fractional reserve banking
Who (partially) owns credit unions?
Account holders
What are the roles of depository institutions?
Create liquidity
Pool Risk
reduce cost of borrowing
reduce cost of monitoring borrowers
What is monetary policy?
changing interest rates/money supply
Who conducts monetary policy?
The central bank (The federal reserve)
What is the makeup of the Federal Reserve System?
board of governors
12 reigional Federal Reserve Banks
Federal Open Market Committee
How many governors are on the Board of Governors?
7
All governors on the B.G serve __ year ___ terms
14 year, nonrenewable terms
Why aren’t the governors terms renewable?
To reduce political influence
Who appoints the chair of the federal reserve?
POTUS
How long is the term of the chair of the federal reserve?
4 years, renewable
How many regional Federal Reserve banks are there?
12
What makes up the Federal Open Market Committee?
7 governors, NY federal reserve president, 4 other reserve presidents on a rotational basis
What are the roles of the Central Bank?
Conduct monetary policy
Serve as the bankers’ bank
Serve as a lender of last resort
What happens when a country dollarizes (besides adopting another country’s currency)
The central bank of the dollarizing country loses control of monetary policy
What are two ways in which a central bank might lose control of monetary policy?
Joining a currency union
Dollarizing
What are the monetary policy tools?
Open market operations
Reserve Requirement
Discount policy
What are the open market policies?
Transactions that increase or decreases the fed’s reserve rate
What kind of open market policies are there?
Open market purchases and open market sales
What happens if the reserve requirement is lowered for commercial banks?
Suppliable loans increase
What is the monetary base?
All cash and coins plus all bank reserves
What kind of monetary policy is open market purchases?
Expansionary
What grows with a money market purchase?
The monetary base and the money supply grows by more
What happens during a money market purchase?
Federal Reserve purchases a non-money asset from a depository institution
The Fed pays by increasing the banks reserve balance
The monetary base grows
What do open market sales do?
Shrink the size of the monetary base and money supply
What kind of monetary policy are market sales?
Contractionary
