Money, Banking And The FED part 1 Flashcards
The function of money that allows you to save value of labor to be used at a later date
Store of value
What are the three functions of money
Act as a medium of exchange, a unit of measure other known as a unit of account, and a store of value
Function of money that allows you to trade for goods and services more easily than bartering
Medium of exchange
Function of money that allows you to precisely calculate the value of a good or service in the utility provided
Unit of measure or unit of account
What are the two types of money
Commodity money and Fiat money
Type of money that has value outside of being money
For example coins made from gold or another precious metal
Commodity money
Type of money that has no value outside of being money
Example is paper currency
Fiat money
This is the representation of some value
Money
What are the characteristics of modern money that makes it a good medium of exchange
Easily divisible Easily transportable Durable Universal acceptance Difficult to reproduce
The ability of an asset to be used to make purchases in simple terms easy to convert an asset into cash
Liquidity
What are highly liquid forms of money
Cash checks savings accounts
What are less liquid forms of money
Bonds collectibles Stocks jewelry
What does liquidity determine
What counts as actual money in the economy
What is liquidity closely connected to
Interest rates
Measure that is 100% liquid
M1
What all is included in M1
Cash, coin, checking accounts, travelers checks
2.8 trillion
Slightly less liquid than M1, earns interest, usually sits for a a while
M2
What does M2 include
M1, savings accounts, money market accounts, time deposits, money market mutual funds
the above accounts must be less than $100,000
11 trillion
Broadest measure of money
M3
What does M3 include
M2 plus time deposits over $100,000 and large money market mutual funds
What type is used to buy things and what type is short-term savings
M1 to buy, and M2 for short-term savings
What is a pure money what is a near money
Pure money is the liquid M1
Near money is an asset that does not function directly as a medium of exchange but can readily be converted into M1
It is M2
How many times is each dollar used
Multiple times this should not be confused with GDP
What is money in relation to economic activity
Money influences economic activity it is not equal to it
What is fractional reserve banking
Keeping a fraction of deposits in reserve to pay back customers
based on old-fashioned gold banking
What are the risks in fractional reserve banking
Runs on the bank
Make too many loans in search of a irrational profits
Inflation may result from rapid creation of money
Things of value that the bank owns
Examples cash, deposits, loans, real estate, reserves
Assets
Things of value the bank owes
Examples deposits, loans
Liabilities
Percent of deposits set-aside by law to repay customers
Reserves
What is the relation between assets and liabilities
Assets must exceed liabilities or the bank is in trouble
Amount left over after the required reserves this amount can then be loaned out
Excess reserves
Legal minimum the bank must set aside
Required reserves
What is this formula for the simple deposit multiplier
One over required reserves
What are the two critical assumptions that must be made in order for the multiplier to work
All money must be redeposited
All excess reserves must be reloaned
When determining the new money put into the economy what must be taken into account
Subtracting by the initial amount
What is the jobs of the Federal Reserve
Regulate the financial system
Act as the governments bank
Act as a lender of last resort during a liquidity crisis
Conduct monetary policy by controlling the money supply
What does the federal reserve do even though it sits outside of the circular flow
Heavily influences the financial/banking sector
Conduct monetary policy
Connects the government to the financial market
What is the organization of the Federal Reserve
Board of governors
12 district banks
FOMC ( Federal open market committee)
Seven members on a 14 year term
Make big picture financial decisions
Yellen is the first woman chair person
Board of governors
Chosen by member banks
Carry out federal goals/jobs at the regional level
12 district banks
Most important
Seven governors in five regional presidents one president is always from New York
Make monetary policy decisions control money supply
Federal open market committee
Altering the money supply to steer economic activity
Monetary policy
Increase money supply increase GDP decrease unemployment
Expansionary monetary policy
Decrease money supply decreased GDP decreased inflation
Contractionary monetary policy
Meet eight times per year to decide what the economy needs moneywise to meet goals maximum output stable prices low unemployment
Federal open market committee
When it comes to monetary policy what are the tools of the Federal Reserve
Reserve requirements
Discount rates
Open market operations
This changes the banks reserves and the multiplier
Reserve requirement
This changes the interest-rate that the federal reserve charges member banks to borrow
Discount rate
Buying or selling bonds to change the federal funds rate
Open market operations
What is the most effective tool when it comes to monetary policy
Open-market operations
What is often used as a signal indicating where the Federal Reserve wants to go in monetary policy
Discount rate change
Why is the reserve requirement change rarely used except during a huge crisis
Yes it is too strong it has a double effect on the monetary base
either adds or subtracts reserves that the banks can use to lend to customers and changes the simple deposit multiplier affecting the amount of money that banks can create
What is the federal funds rate
The rate the banks charge each other to borrow money
