Module 25 Flashcards
Bank
(commercial bank) A financial institution that accepts deposits and makes loans; banks are sometimes referred to as “depository institutions.”
Central bank
(sometimes called a reserve bank or banking authority) an institution that manages a country’s money supply and monetary policy
Financial intermediary
a middle-person in a financial transaction; a bank is an intermediary that coordinates borrowing and lending by combining the deposits of many agents into loans.
Assets
something of value to the agent that holds it; a bank’s assets include real assets owned by the bank (such as a building), the money they hold, and financial assets such as bonds and loans.
Liabilities
obligations to pay back; to a bank, your savings account is a liability because you might show up one day and want the money you deposited back.
Fractional reserves
the practice of keeping a percentage of deposits on hand but loaning out the rest
Reserve requirement
a legal obligation to keep a minimum amount of reserves; if the reserve requirement is 20% percent and you deposit $100 in a bank, the bank must keep $20 of that in its vaults, but it can loan out the rest.
Excess reserves
the remainder of the deposited money that banks are not required to keep on hand; banks can make loans out of excess reserves or choose to keep excess reserves in their vaults.
Fully loaned out
a situation in which a bank has only required reserves and keeps no excess reserves; when a bank is fully loaned out it cannot make any additional loans.
T-account
a tool for describing the financial position of a business by showing assets (on the left) and liabilities (on the right) in a table; each side of the table must equal the other side.
Money multiplier
the ratio of the money supply to the monetary base (money in bank vaults and money in circulation); the money multiplier tells us how many additional dollars will be created with each addition to the monetary base, such as when there is a
$1, 1 increase in a bank’s reserves.
MM
money multiplier
MM
1/rr
MM
=1/rr
So, if I know that the money multiplier is 4 then if the central bank creates
$100 in money, the money supply will increase by $400 at most.
Excess Reserves
Total/actual reserves-Required Reserves
Required Reserves
Total Assets *Reserve Ratio(as decimal)
Owners Equity
money owned to the owners or shareholders of the bank(Liabilities)
Money
any asset that can be accepted as means of payments
US Dollars
Fiat Money
unit of account
people commonly accept money as a way to set prices.
Store value
-money holds purchasing power over time
-inflation can decrease money’s ability to store value, (fewer dollars to buy same good years ago)
-savings accounts or tong-term savings, store of value.
medium of exchange
-money used to exchange goods and services
-barter economies(more opportunity cost) vs Money economics(more efficient)
-helps economics grows faster
Monetary Base
actual money in circulation +Federal reserve money
M1
M2
hard
CD
certificate of deposits
M2–>M1(internal)
M1=increase M2=no change
M1–>M2(internal)
M1=decrease M2=no change
M1(external) into checking
M1=increase M2=increase
M2(external) into savings
M1=NC M2=increase
M1
liquid money, short term
M2
hard money, not fluid ( not readily available)
Levels of liquidity
1.Cash (most liquid)
2. Demand Deposits
3. Savings Accounts
4. Bonds (last many years)
commodity money
gets its value from the material from which it is made
commodity-backed money
which has no intrinsic value but can be exchanged for a commodity which does have value
fiat money
which is currency that has not intrinsic value but is declared legal tender by a government entity.
M1
(most liquid) cash, checkable deposits, and traveler’s checks
M2
near-moneys(less liquid), M1+savings accounts, time deposits (CD’s), and money market savings
assets(left)
what you owe
liabilities(right)
what you own
how banks create money
by creating loans
Functions of the Fed:
1) provide financial services to banks (holds reserves for banks, clear checks, holds the U.S. Treasury’s checking account)
2) supervises and regulates most but not all banks through its 12 regional banks;
3) maintains the stability of the financial system through its Board of Governors (SAVED THE DAY DURING THE GREAT RECESSION!!!)
4) conducts monetary policy to achieve the macroeconomic goals of the U.S. economy.
Monetary policy tools of the Fed:
1) set the reserve requirement for all member banks – if banks are temporarily short in reserves they can borrow from other banks at the federal funds rate
2) set the discount rate – the interest rate that banks pay if they need to borrow from the Fed
3) open-market operations – buying or selling of securities from commercial banks to increase
or decrease the excess reserves used to make loans and thus to increase or decrease the money supply.
Open-market operations are decided upon by the Federal Open-Market Committee. Be
sure to know the specific effect of open-market operations on banks’ T-accounts and the
potential money creation (or reduction).
Open-market operations
Open-market operations are decided upon by the Federal Open-Market Committee.
expansionary monetary policy during a recessionary gap
a) buy securities (bonds) from commercial banks
b) lower the discount rate (and/or c) lower the reserve requirement
contractionary monetary policy during an inflationary gap
a) sell securities (bonds) to commercial bank
b) raise the discount rate( and/or c) raise the reserve requirement
money market
the relationship between the demand for money by consumers and firms and the money supply that is available at a nominal interest rate.
Relationship between the nominal interest rate ,money in hand and in a checking account.
inverse relationship
Quantity of money demanded at higher interest rates
At higher interest rates, less quantity of money will be demanded.
Two aspects of demand for money or money demand curve consists
1)the transaction demand for money- money that needs to be spent to buy things in the very short-term; the transaction demand for money is perfectly inelastic because it is not sensitive to nominal interest rates
2) the asset demand for money-downward sloping – if interest rates are high, then people will hold less money in their checking accounts or cash and will put more of it in savings accounts or other assets (such as stocks, bonds, or real estate) that provide more return.
The overall effect of the two aspects of the demand for money
downward-sloping demand for money curve.
The money supply curve is vertical because?
the money supply is targeted by the Fed as a means for determining interest rates in the economy.
If the Fed wants to increase interest rates
decrease the money supply usually by raising the discount rate and/or selling bonds to banks.
If the Fed wants to decrease interest rates
increases the money supply by lowering the discount rate and/or buying bonds from banks.
increase in the money supply
shift AD to the right, lowers interest rates and increases aggregate expenditures (esp., Investment spending)
A decrease in the money supply
a leftward shift in AD
savings-investment spending identity
Savings are used by firms for
investment in capital stock, inventory, and growth
