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ECONOMOMICS > Second Set > Flashcards

Second Set Flashcards

1
Q

Chp 16: Money Stock

A

Quantity of Money circulating in Economy

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2
Q

Chp 16: Currency

A

Paper bills and coins in the hands of the public

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3
Q

Chp 16: Fiat Money

A

Money without intrinsic value
- used as money because of government decree
-“this note is legal tender for all debts”

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4
Q

Chp. 16: Commodity money

A

Money that takes the form of a commodity with intrinsic value: gold, cigarettes

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5
Q

Chp. 16: intrinsic value

A

item would have value even if it were not used as money

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6
Q

Chp 16: Gold standard - Gold as money

A

or paper money that is convertible into gold on demand

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7
Q

Chp 16: Demand Deposits

A

Balances in bank accounts; depositors can access on demand by writing a check

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8
Q

Chp 16: Measures of Money Stock

A

M1 -
Demand deposits, travelers checks
M2 -
Everything in M1
Savings deposits, small time deposits
money market mutual funds
a few minor categories

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9
Q

Chp 16: Central bank

A

-Institution designed to
oversee the banking system
regulate the quantity of money in the economy

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10
Q

Chp 16: What is not a good way to hold wealth?

A

currency; because it can be lost or stolen

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11
Q

Chp 16: The Federal Reserve (the Fed)

A
  • 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
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12
Q

Chp 16: The Federal Reserve (the fed) (Organization) - Board of Governors

A
  • 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)
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13
Q

Chp 16: The Federal Reserve System

A

-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

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14
Q

The Fed’s jobs

A

-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

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15
Q

Chp 16: The Fed’s Job (continued)

A
  • 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
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16
Q

Chp 16: Federal Open Market Committee (FOMC)

A
  • 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
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17
Q

Chp 16: Fed’s primary tool: open-market operation

A

purchase + sale of U.S. government bonds

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18
Q

Chp 16: FOMCS - increase the money supply

A

The Fed: open-market purchase

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19
Q

chp 16: FOMC - decrease the money supply

A

The Fed: open-market sale

20
Q

Chp 16: Money Supply

A

Money
- currency + demand deposits
Behavior of banks
-can influence the quantity of demand deposits in the economy (and the money supply)

21
Q

Chp 16: Reserves

A

Deposits that banks have received but have not loaned out

22
Q

Chp 16: Why do we not do 100% reserve banking?

A

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

23
Q

Chp 16: Fractional Reserve-Banking

A

The practice where banks hold only a fraction of deposits as reserves (fraction TBD) and the rest is up for loan

24
Q

Chp 16: Reserve Ratio

A

Fraction of deposits that banks hold as reserves

25
Q

Chp 16: Reserve Requirement

A

Minimum amount of reserves that banks must hold; set by the fed

26
Q

Chp 16: Excess Reserve

A

Banks may hold reserves above the legal minimum

27
Q

Chp 16: Reserve Ratio continued

A

Banks hold only a fraction of deposits in reserve
-banks create money
*assets
*liabilites
-increase in money supply
-does not create wealth

28
Q

Chp 16: The Money Multipliers

A

Original deposit $100.00
-First national lending = $90 [.9x100.00]
this continues, taking this base formula

original deposit/ loan amt x RR (reserve ratio)

29
Q

Chp 16: The money multipliers continued

A

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)

30
Q

Chp 16: Properties of the reserve ratio

A

The higher the reserve ratio; the smaller the money multiplier

31
Q

Chp 16: Bank capital

A

resources a bank’s owners have put into the institution; used to generate profit

32
Q

Chp 16: Leverage

A

Use of borrowed money to supplement existing funds for purpose of investment

33
Q

Chp 16: Leverage Ratio

A

Ratio of assets to bank capital

34
Q

Chp 16: Capital requirement

A

Government regulation specifying a minimum amount of bank capital

35
Q

Chp 16: Fed’s tools of monetary control

A

-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

36
Q

Chp 16: Fed’s Tools of Monetary Control

A

Fed lending to banks
- to increase the money supply
-discount window
*at the discount rate
-term auction facility
*to the highest bidder

37
Q

Chp 16: Fed’s tools of monetary control (continued)

A

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

38
Q

Chp 16: Fed’s tools of monetary control (continued 2)

A

Influences the quantity of reserves
-open-market operations
-fed lending to banks
Influences the reserve ratio
-reserve requirements
-paying interest on reserves

39
Q

Chp 16: The Fed’s tools of monetary control (continued 3)

A

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

40
Q

Chp 16: Term auction facility

A

-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

41
Q

Chp 16: Reserve Requirements

A

-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

42
Q

Chp 16: Paying interest on reserves

A

-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

43
Q

Chp 16: Problems

A

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

44
Q

Chp 16: The federal funds rate

A

-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

45
Q

Chp 16: The federal funds rate

A

-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

46
Q

Chp 16: The fed targets the federal funds rate through open-market operations

A

-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

ECONOMOMICS (6 decks)

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