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macroecon > Money, Banking, Monetary Policy > Flashcards

Money, Banking, Monetary Policy Flashcards

1
Q

what are the 3 essential features of money?

A

medium of exchange, store of value, unit of account

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2
Q

what is unit of account?

A

money creates common language for measurement, can compare values of items

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3
Q

what is fiat money?

A

Money declared by the govt as medium of exchange - no intrinsic value
- non-consumable
- non perishable

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4
Q

During a recession due to political instability, people are more likely to accept fiat/commodity money?

A

Commodity, as they lose faith in govt decreed money

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5
Q

what is the function money plays as a store of value?

A

a means of holding wealth, recently declined due to stocks, crypto, etc

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6
Q

are checkable deposits M1/M2?

A

M1

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7
Q

are savings accounts M1/M2?

A

M2

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8
Q

are traveler’s checks M1 or M2?

A

M1

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9
Q

are mutual funds M1/M2?

A

M2

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10
Q

are money market funds M1/M2?

A

M2

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11
Q

rr formula

A

reserves/deposits

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12
Q

how much money is created in the first round after $x deposit?

A

$x x (1 - rr)

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13
Q

What is the money multiplier?

A

the rate at which banks multiply money.
mm = 1/rr

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14
Q

What is the potential amount of money that can be created from $x deposit?

A

(money multiplier) mm x $x

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15
Q

Who does deposit insurance?

A

FDIC - guarantees depositors don’t lose money if banks go bankrupt

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16
Q

why could money created by bank be less than potential?

A

if people hold cash or banks hold excess reserves

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17
Q

what are the 3 roles of the Fed?

A

Central banking - lender of last resort, monetary policy - bank for banks, bank regulation

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18
Q

what are discount loans?

A

loans from the Fed to PRIVATE banks

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19
Q

what are federal funds?

A

private bank deposits at Fed

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20
Q

what is the Federal Funds rate?

A

the rate of interest on loans between 2 banks

21
Q

who sets the federal funds rate?

A

negotiated between 2 banks

22
Q

who regulates the federal funds rate? how?

A

the Fed, through monetary policy

23
Q

who sets the reserve ratio?

A

the FED

24
Q

to increase interest rate, Fed buys/sells securities?

A

SELLS (to banks) - receives money from banks in exchange - banks have less reserves - less money supply in economy, higher interest rates

25
Q

to increase bank reserves, Fed buys/sells securities?

A

BUYS - pays money to banks for it - more money supply - excess reserves for banks

26
Q

what are open market operations?

A

when Fed buys/sells securities to change interest rates

27
Q

which is more effective - changing discount rates or open market operations?

A

open market operations - closely linked to bank borrowing

28
Q

When inflation is high, expansionary/contractionary monetary policy is used?

A

Contractionary

29
Q

When unemployment is high, expansionary/contractionary monetary policy is used?

A

Expansionary

30
Q

For expansionary monetary policy, FOMC increases/decreases FFR?

A

Decreases (AD too low - encourage spending)

31
Q

For contractionary monetary policy, FOMC increases/decreases FFR?

A

Increases (AD too high - decrease spending)

32
Q

to increase FFR, FED increases/decreases IORB?

A

Increases - other banks increase FFR through arbitrage

33
Q

To decrease FFR, FED increases/decreases IORB?

A

Decreases - other banks lower FFR through arbitrage

34
Q

What is the FED’s dual mandate?

A

max employment, price stability (low inflation)

35
Q

what is a bank run?

A

when all depositors try to withdraw cash out of accounts

36
Q

what is systemic risk?

A

risks to the entire financial system because of banks that are too interconnected
(eg bank runs are contagious)

37
Q

to depositors, bank deposits are assets/liabilities?

A

assets (must be paid to depositor)

38
Q

to banks, bank deposits are assets/liabilities?

A

liabilities - OWED back to depositors (must be paid out)

39
Q

to banks, loans are assets or liabilities?

A

assets - money OWNED by the banks, loaned out (must be paid to bank)

40
Q

what are assets?

A

anything OWNED - must be received/paid back

41
Q

what are liabilities?

A

anything OWED - must be paid out

42
Q

what is net worth?

A

assets - liabilities

43
Q

during recessions, banks tend to hold more/less excess reserves?

A

more - scared to lend out, reduces multiplier

44
Q

expansionary monetary policy is used to lower/increase interest rates?

A

lower - expansionary - increase money supply - lower interest rates

45
Q

higher interest rates reduce/increase investment in housing?

A

reduce - more expensive to take out housing loan

46
Q

what is the chain of events of expansionary monetary policy?

A

recession -> Fed buys T bills -> banks have more reserves -> interest rates lower -> more investment I -> multiplier effect on spending -> AD increases

47
Q

what are the 3 mechanisms of monetary policy used by the Fed?

A
  • open market operations
  • discount rates
  • reserve requirements
48
Q

when Fed buys bills/bonds, what happens to prices and interest rates?

A

prices rise, interest rates fall

49
Q

when Fed buys $1 of bonds/securities, supply of money/checkable deposits increases by?

A

mm x $1

macroecon (9 decks)

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