Macroeconomics - Ch 14

Question 1

Medium of exchange

Answer 1

money; usable for buying and selling goods and services

Question 2

Unit of account

Answer 2

yardstick for measuring the relative worth of a wide variety of goods, services, and resources

Question 3

Store of value

Answer 3

enables people to transfer purchasing power from the present to the future

Question 4

liquidity

Answer 4

ease with which an asset can be converted quickly into the most widely accepted and easily spent forms of money, cash, with little or no loss of purchasing power

Question 5

M1

Answer 5

narrowest definition of the US money supply; consists of currency (coins and paper money) in the hands of the public & all checkable deposits (all deposits in commercial banks and “thrift” or savings institutions on which checks of any size can be drawn)

Question 6

Federal Reserve Notes

Answer 6

paper money issued by the Federal Reserve Banks

Question 7

Token money

Answer 7

face value of any piece of currency is unrelated to its intrinsic value - the value of the physical material (metal or paper/ink) out of which that piece of currency is constructed

Question 8

Checkable deposits

Answer 8

large component of M1 money supply (49%); any deposit in a commercial bank or thrift institution against which a check may be written

Question 9

Commercial banks

Answer 9

primary depository institutions; accept deposits of households/businesses, keep the money safe until it is demanded via checks, and use it to make available a wide variety of loans

Question 10

Savings/Thrift Institutions

Answer 10

Savings/Loan Associations, mutual savings banks, credit unions; S&L’s and mutual savings banks accept deposits of households and businesses, then use the funds to finance housing mortgages and to provide other loans; credit unions accept deposits from and loan to “members”, who usually are a group of people who work for the same company

Question 11

Near-monies

Answer 11

certain highly liquid financial assets that do not function directly or fully as a medium of exchange but can be readily converted into currency or checkable deposits

Question 12

M2

Answer 12

M1 + noncheckable savings accounts (including money market deposit accounts), small time deposits (deposits of less than $100,000), and individual money market mutual fund balances

Question 13

Savings account

Answer 13

deposit in a commercial bank or thrift institution on which interest payments are received; generally used for saving rather than daily transactions; a component of the M2 money supply

Question 14

Money market deposit account (MMDA)

Answer 14

interest-bearing account containing a variety of interest-bearing short-term securities; has a minimum balance requirement and a limit on how often a person can withdraw funds

Question 15

Time deposits

Answer 15

deposits that become available at their maturity

Question 16

Money market mutual fund (MMMF)

Answer 16

interest-bearing accounts offered by investment companies, which pool depositors’ funds for the purchase of short-term securities; depositors can write checks in minimum amounts or more against their accounts

Question 17

Legal tender

Answer 17

a nation’s official currency (bills and coins); payment of debts must be accepted in this monetary unit, but creditors can specify the form of payment, for example “cash only” or “check or credit card only”

Question 18

Federal Reserve System

Answer 18

US monetary authorities; AKA “the Fed”

Question 19

Board of Governors

Answer 19

central authority of the US money and banking system is the BOG of the Federal Reserve System

Question 20

Federal Reserve Banks

Answer 20

12; blend private and public control; collectively serve as the nation’s central bank; also serves as bankers’ banks

Question 21

Federal Open Market Committee (FOMC)

Answer 21

aids the Board of Governors in conducting monetary policy; made up of 12 people (7 members of the Board of Governors, president of the NY Federal Reserve Bank, 4 of the remaining presidents of Federal Reserve Banks on a 1-year rotating basis)

Question 22

Subprime mortgage loans

Answer 22

high-interest-rate loans to home buyers with higher-than-average credit risk

Question 23

Mortgage-backed securities

Answer 23

bonds backed by mortgage payments

Question 24

Securitization

Answer 24

process of slicing up and bundling groups of loans, mortgages, corporate bonds, or other financial debts into distinct new securities

Question 25

Troubled Asset Relief Program (TARP)

Answer 25

allocated $700 billion to the US treasury to make emergency loans to critical financial and other US firms in 2008 (“bailout money”)

Question 26

Moral hazard

Answer 26

tendency for financial investors and financial services firms to take on greater risks because they assume they are at least partially insured against losses

Question 27

Financial Services Industry

Answer 27

commercial banks, thrifts, insurance companies, mutual fund companies, pension funds, security firms, and investment banks

Question 28

Wall Street Reform and Consumer Protection Act

Answer 28

2010 law including provisions that eliminate the Office of Thrift Supervision and give broader authority to the Federal Reserve to regulate all large financial institutions, create a Financial Stability Oversight Council to be on the lookout for risks to the financial system, establish a process for the federal gov’t to liquidate (sell off) assets of large failing financial institutions, much like the FDIC does with failing banks, provide federal regulatory oversight of mortgage-backed securities and other derivatives and require that they be traded on public exchanges, require companies selling asset-based securities to retain a portion of those securities so the sellers share part of the risk, & establish a stronger consumer financial protection role for the Fed through the creation of the Bureau of Consumer Financial Protection