Second Set Flashcards
Chp 16: Money Stock
Quantity of Money circulating in Economy
Chp 16: Currency
Paper bills and coins in the hands of the public
Chp 16: Fiat Money
Money without intrinsic value
- used as money because of government decree
-“this note is legal tender for all debts”
Chp. 16: Commodity money
Money that takes the form of a commodity with intrinsic value: gold, cigarettes
Chp. 16: intrinsic value
item would have value even if it were not used as money
Chp 16: Gold standard - Gold as money
or paper money that is convertible into gold on demand
Chp 16: Demand Deposits
Balances in bank accounts; depositors can access on demand by writing a check
Chp 16: Measures of Money Stock
M1 -
Demand deposits, travelers checks
M2 -
Everything in M1
Savings deposits, small time deposits
money market mutual funds
a few minor categories
Chp 16: Central bank
-Institution designed to
oversee the banking system
regulate the quantity of money in the economy
Chp 16: What is not a good way to hold wealth?
currency; because it can be lost or stolen
Chp 16: The Federal Reserve (the Fed)
- central bank of the United States
-Created in 1913 after a series of bank failures in 1907
-purpose: to ensure the health of the nation’s banking system
Chp 16: The Federal Reserve (the fed) (Organization) - Board of Governors
- 7 members, 14-year terms
-appointed by the president and confirmed by the senate
Chairman: Jerome Powell - directs the Fed staff
-presides over board meetings
-testifies regularly about Fed policy in front of congressional committees
-appointment by the president (it’s a 4-year term)
Chp 16: The Federal Reserve System
-Federal Reserve Board in Washington D.C
-12 regional federal Reserve banks
* major cities around the country
* The presidents are chosen by each bank’s board of directors
The Fed’s jobs
-regulate banks and ensure the health of the banking system
* regional federal reserve banks
* monitors each bank’s financial condition
* facilitate’s bank transactions - clearing checks
* acts as a bank’s bank
* the fed - lender of last resort
Chp 16: The Fed’s Job (continued)
- control the money supply
*quantity of money available in the economy
*monetary policy: by the federal open market committee (FOMC)
-Money Supply - quantity of money available in economy
-Monetary policy - setting of the money supply
Chp 16: Federal Open Market Committee (FOMC)
- 7 members of the board of governors
-5 of the twelve regional bank presidents- all twelve regional presidents attend each FOMC meeting, but only five get to vote
-Meets about every 6 weeks in Washington, D.C
-Discuss the condition of the economy
Consider changes in monetary policy
- all twelve regional presidents attend each FOMC meeting, but only five get to vote
Chp 16: Fed’s primary tool: open-market operation
purchase + sale of U.S. government bonds
Chp 16: FOMCS - increase the money supply
The Fed: open-market purchase
chp 16: FOMC - decrease the money supply
The Fed: open-market sale
Chp 16: Money Supply
Money
- currency + demand deposits
Behavior of banks
-can influence the quantity of demand deposits in the economy (and the money supply)
Chp 16: Reserves
Deposits that banks have received but have not loaned out
Chp 16: Why do we not do 100% reserve banking?
All deposits are held as reveres
- banks do not influence the supply of money
- banks have no money to loan out/ therefore no way to profit
Chp 16: Fractional Reserve-Banking
The practice where banks hold only a fraction of deposits as reserves (fraction TBD) and the rest is up for loan
Chp 16: Reserve Ratio
Fraction of deposits that banks hold as reserves
Chp 16: Reserve Requirement
Minimum amount of reserves that banks must hold; set by the fed
Chp 16: Excess Reserve
Banks may hold reserves above the legal minimum
Chp 16: Reserve Ratio continued
Banks hold only a fraction of deposits in reserve
-banks create money
*assets
*liabilites
-increase in money supply
-does not create wealth
Chp 16: The Money Multipliers
Original deposit $100.00
-First national lending = $90 [.9x100.00]
this continues, taking this base formula
original deposit/ loan amt x RR (reserve ratio)
Chp 16: The money multipliers continued
To find out how much money will be in the economy at the very end, you can do the following
original deposit/ loan amt. x Multiplier ( 1/RR (reserve ratio)
Chp 16: Properties of the reserve ratio
The higher the reserve ratio; the smaller the money multiplier
Chp 16: Bank capital
resources a bank’s owners have put into the institution; used to generate profit
Chp 16: Leverage
Use of borrowed money to supplement existing funds for purpose of investment
Chp 16: Leverage Ratio
Ratio of assets to bank capital
Chp 16: Capital requirement
Government regulation specifying a minimum amount of bank capital
Chp 16: Fed’s tools of monetary control
-purchase and sale of U.S government bonds by the Fed
-to increase the money supply
*the fed buys U.S government bonds
-To reduce the money supply
*The fed sells U.S government bonds
-Easy to conducts
-used more often
Chp 16: Fed’s Tools of Monetary Control
Fed lending to banks
- to increase the money supply
-discount window
*at the discount rate
-term auction facility
*to the highest bidder
Chp 16: Fed’s tools of monetary control (continued)
the discount rate
-interest rate on the loans that the fed makes to banks
-higher discount rate
*reduce the money supply
-smalle discount rate
*increase the money supply
Chp 16: Fed’s tools of monetary control (continued 2)
Influences the quantity of reserves
-open-market operations
-fed lending to banks
Influences the reserve ratio
-reserve requirements
-paying interest on reserves
Chp 16: The Fed’s tools of monetary control (continued 3)
the discount rate
-interst rate on the loans that the fed makes to banks
-higher discount rate
*reduce the money supply
-smalle discount rate
*increase the money supply
Chp 16: Term auction facility
-The fed sets a quantity of funds it wants to Lend to banks
-eligble banks bid to borrow those funds
-loans go to the highest eligible bidders
*acceptable collateral
*pay the highest interest rate
Chp 16: Reserve Requirements
-minimum amount of reserves that banks must hold against deposits
* an increase in reserve requirement: decrease the money supply
*a decrease in reserve requirement: increase the money supply
- used rarely - disrupt business of banking
-less effective in recent years
*many banks hold excess reserves
Chp 16: Paying interest on reserves
-since October 2008
-the higher the interest rate on reserves
*the more reserves banks will choose to hold
-an increase in the interest rate on reserves
*increase the reserves ratio
*lower the money multiplier
*lower the money supply
Chp 16: Problems
The Fed’s control of the money supply is not precise; the fed does not control the amount of money that households choose to hold as deposits in banks and the amount that bankers choose to lend
Chp 16: The federal funds rate
-interst rate at which banks make overnight loans to one another
*lender -has excess reserves
*borrower -needs reserves
-change in federal funds rate
*changes other interest rates
Chp 16: The federal funds rate
-differs from the discount rate
-affects other interest rates as well
-is determined by supply and demand in the –market for loans among banks
-targeted by the fed
*change the federal funds rate
*change the money supply
Chp 16: The fed targets the federal funds rate through open-market operations
-the fed buys bonds
*decrease in the federal funds rate
*increase in money supply
-the fed sells bonds
*increase in the federal funds rate
*decrease in money supply
