Macro Economics Chapter 15 Power Point Flashcards
The Federal Reserve (the Fed) and banks work together to influence?
the supply of money
In the Middle Ages, what was used for money?
Gold was the money of choice in most European nations.
Who were the founders of our modern-day banking?
Goldsmiths, people who would keep other people’s gold safe for a service charge.
What was the first currency?
People would use the receipts they received from goldsmiths as paper money.
How did the early goldsmiths act as the first banks?
Some goldsmiths made loans and received interest
Where do banks get their money to lend?
From depositors
What is fractional reserve banking?
A system in which banks keep only a small percentage of their deposits in reserve.
What are required reserves?
The minimum balance that the Fed requires a bank to hold in vault cash or on deposit with the Fed.
What is a required reserve ratio?
The percentage of deposits that the Fed requires a bank to hold in vault cash or on deposit with the Fed
What is the Required Reserve Ratio of the Fed?
7.8 million through 48.3 million = 3%Over 48.3 million = 10%
What are excess reserves?
Potential loan balances held in vault cash or on deposit with the Fed in excess of required reserves.
What money do banks use to lend out?
Banks are allowed to loan money taken from their excess reserves.
What are total reserves?
Total reserves equal required reserves plus excess reserves.
What are three steps in the multiplication of money?
•accepting a new deposit•making a loan•clearing the loan check
When will the money supply increase?
The money supply increases when banks lend money to borrowers.
What is the money multiplier?
Because money is passed from person to person, there is a multiple effect on any initial money banks lend to borrowers.
What is the money multiplier equal to?
1 / required reserve ratio
If the reserve ratio is one tenth, what is the multiplier?
1 / 1/10 = 10
If the reserve ratio is one twentieth, what is the multiplier?
1 / 1/20 = 20
What conclusion can we make?
There is an inverse relationship between the size of the required reserve ratio and the money multiplier
Actual money supply change
Initial change in excess reservesMoney multiplier.
Can the multiplier be smaller than indicated?
Yes, because of cash leakages and the chance that banks will not use all of their excess reserves to make loans.
What is an example of a leakage?
When people receive money but decide to save the entire amount instead of spending most of it.
What is monetary policy?
The Fed’s use of policy tools to change the money supply.
What would the Fed do when we have unemployment?
Increase the money supply.
What would the Fed do when we have inflation?
Decrease the money supply.
How does the Fed effect a change in the money supply?
It will use its monetary tools to influence banks.
How does the Fed influence a bank?
•open market operations•change in the discount rate•change in the required reserve ratio.
What are open market operations?
The buying and selling of government securities
What would the Fed do if we have unemployment?
Buy securities; this will increase the money supply.
What is the discount rate?
The interest rate the Fed charges on loans to banks.
What would the Fed do with unemployment?
Decrease the discount rate
What would the Fed do if we have inflation?
Increase the discount rate
What is the federal funds market?
A private market in which banks lend reserves to each other for less than 24 hours.
What is the federal funds rate?
The interest rate banks charge for overnight loans of reserves to other banks.
What would the Fed do with unemployment?
Decrease the federal funds rate
What would the Fed if we have inflation?
Increase the federal funds rate
What is the reserve ratio?
The Fed determines how much a financial institution must keep in reserve as a percentage of its total assets.
What would the Fed do if we had unemployment?
Decrease the reserve ratio
What would the Fed do if we had inflation?
Increase the reserve ratio
Is changing the reserve ratio a popular monetary tool?
No, changing the reserve ratio generates some instability and is thus infrequently used.
What are shortcomings of monetary policy?
•multiplier inaccuracy•competition of nonbanks•definition of money•lag effects
