Money Flashcards
Three functions of money
Medium of exchange, unit of account (the yardstick people use to post prices and record debts), and store of value (an item that people can use to transfer purchasing power from present to the future)
Commodity money
Money that takes the form of a commodity with intrinsic value. Example: gold
fiat money
Money without intrinsic value that is used as money because of government decree.
When was the Fed created?
1913 after a series of bank failures in 1907
Who is the fed ran by?
Board of governors, 7 members with 14-year terms appointed by president and confirmed by senate.
Fed governor terms and why?
14 year terms to give them independence from short-term political pressures when they formulate monetary policy
The current and two past chairmen of the Fed
Bernanke in past and current Janet Yallen
3primary jobs of the fed
- Regulate banks and Ensure the health of the banking system.
- Bank’s bank–when financially troubled banks find themselves short of cash, the Fed is a lender of last resort–to maintain stability in the overall banking system
- Control the money supply (the quantity of money made available in the economy. This makes up monetary policy.
Who makes monetary policy and what is the structure?
Federal Open Market Committee, which meets every 6 weeks in DC to discuss condition of economy. Made of 7 members of board of governors and 5 of 12 regional bank presidents (one always being the NY president)
What is the primary tool in changing the money supply?
Open market operation–the purchase and sale of US government Bonds
Fractional-reserve banking
banks only hold a fraction of deposits on reserve e
Reserve Ratio
fraction of deposits that the banks hold
What is the significance of reserve ratio?
When banks hold only a fraction of deposits in reserve, banks create money. Because a deposit counts for one person and the acceptance of a loan for another person is counted as money too.
What is the money multiplier
Amount of money the banking system generates with each dollar of reserves. It’s the reciprocal of the reserve ratio
bank capital
the resources a bank’s owners have put into the institution
Leverage
the use of borrowed money to supplement existing funds for purpose of investment
Each new dollar held as currency increases the money supply by _____. Each new dollar deposited in a bank increases the money supply by ______________ . Why?
Because in the second example it increases reserves, and therefore, the amount of money that the banking system can create
Open market operations
the purchase and sale of US government bonds by the fed. The fed buys bonds and infuses money into the economy by purchasing it with money that it printed itself
Fed lending to banks
Increase the quantity of reserves in the economy by lending reserves to banks. Banks borrow from the Fed when they don’t have enough reserves on hand to satisfy bank regulators, meet depositor withdrawals, make new loans, or another reason.
How banks borrow from the fed. How does the fed alter the money supply here?
Banks borrow from the Fed’s discount window and pay interest rate on that loan called the discount rate. The fed alters money supply by changing the discount rate. A higher rate discourages banks from borrowing reserves from the Fed, reducing the quantity of reserves, reducing the money supply.
How the fed influences the reserve ratio
- Regulating the quantity of reserves banks must hold. If they require greater reserve amounts, there is less money that can be made because banks must hold on to it.
- Interest rate the Fed pays on their reserves. The higher the interest rate on reserves, the more reserves banks will choose to hold. Thus an increase on reserves will tend to increase the reserve ratio, lower the money multiplier, and lower the money supply.
Federal Funds rate
Short-term interest rate that banks charge one another for loans. If one bank is short of reserves while another has excess, the second bank lends reserves to the first.
