The Monetary System Key Terms Flashcards
Money
The set of assets in an economy that people regularly use to buy goods and services from other people.
What are the three functions of money?
A medium of exchange, a unit of account, a store value
Medium of exchange
an item that buyers give to sellers when they want to purchase goods and services.
Unit of account
The yardstick people use to post prices and record debts.
Store of value
an item that people can use to transfer purchasing power from the present to the future.
What distinguishes money from other assets in the economy (stocks, bonds, art, real estate?
It’s three functions (medium of exchange, store of value, unit of account).
Liquidity
The ease with which an asset can be converted into the economy’s medium of exchange.
Commodity Money
Money that takes the form of a commodity with intrinsic value.
Fiat Money
Money without intrinsic value that is used as money because of government decree.
Money stock
The quantity of money circulating the economy
currency
the paper bills and coins in the hands of the public.
Demand Deposits
Balances in bank accounts that depositors can access on demand by writing a check.
Why aren’t credit cards money?
Because credit cards are not a method of payment, but a method of deferring payment.
Federal Reserve System
The central bank of the United States
The Fed is an example of a
central bank
Central bank
an institution designed to oversee the banking system and to regulate the quantity of money in the economy.
The Fed is run by its
board of governors
How many people are on the board of governors?
Seven members who are appointed by the president and confirmed by the Senate.
How long are the governors’ terms?
14 years
Why are Fed governors given just long terms?
to give them independence from short-term political pressures when they formulate monetary policy.
What is the most important position in the board of governors and what does that person do?
The chairman. This person directs the Fed staff, presides over board meeting and testifies regularly about Fed policy in front of congressional committees. The president appoints the chairman to a four-year term.
The Federal Reserve system is made up of
The Federal Reserve Board in Washington D.C and 12 regional Federal Reserve Banks located in major cities around the country.
Who chooses the presidents of the regional Federal Reserve Banks?
The bank’s board of directors
What two jobs does the Fed have?
- Regulate banks and ensure the health of the banking system
- Control the quantity of money that is made available to the economy (called the money supply).
How do the regional Federal Reserve Banks regulate other banks and ensure the health of the banking system?
the Fed monitors each bank’s financial financial condition and ficilitates banks transactions by clearing checks. Also by acting as a banks’s bank (the Fed makes loans to banks when banks themselves want to borrow).
When financially troubled banks find themselves short of cash the Fed acts as a
Lender of last resort (a lender to those who cannot borrow from anywhere else)
Money supply
is quantity of money that has been created by the government and private banks. It is how much money there is.
Monetary policy
The setting of the money supply by the policy makers in the central bank.
Who makes up the Federal Open Market Committee?
The seven members of the board of governors and five of the regional bank presidents.
The Fed has the power to increase or decrease the number of dollars in an economy through
the decisions of the FOMC
Reserves
Deposits that have been received, but have not been loaned out.
If banks hold all deposits in reserves…
banks do not influence the supply of money
Fractional-reserve banking
a banking system in which banks hold only a fraction of deposits as reserves.
reserve ratio
the fraction of deposits that banks hold as reserves.
How is the reserve ratio determined?
By a combination of government regulation and bank policy.
Reserve requirements
regulations, set by the Fed , on the minimum amount of reserves that banks must hold against deposits.
Excess reserves
The reserves banks hold that are above the legal minimum so they can be more confident that they will not run short of cash.
Money multiplier
The amount of money, the banking system generates with each dollar of reserves.
The higher the reserve ratio…..
…the less of each deposit banks loan out and the smaller the money multiplier
bank capital
the resources a bank’s owners have put into an institution
leverage
the use of borrowed money to supplement existing funds for purposes of investment.
Leverage ratio
The ratio of assets to bank capital.
monetary base
is what the government created. It is equal to currency in the hands of the public plus bank deposits at the Federal Reserve
money supply =
Monetary Base * Money Multiplier
The two ways the Fed controls the monetary base
- OMO (open market operations)
2. Discount rate
Open Market Operations
The purchase and sale of U.S government bonds by the Fed.
Discount rate
the interest rate on the loans that the Fed makes to the banks.
The Fed can also increase the quantity of reserves in the economy by lending reserves to banks. Banks borrow from the Fed when they feel…
they do not have enough reserves on hand, either to satisfy bank regulators, meet depositor withdrawals, make new loans, or for some other business reason.
What is the federal funds rate?
The federal funds rate is the short term interest rate that banks charge one another for loans. If one bank finds itself short on reserves while another bank has an excess of reserves, the second bank can lend some reserves to the fist. The loans are temporary-typically overnight. The price of the loan is the federal funds rate.
Discount rate
the interest rate banks pay to borrow directly from the Federal Reserve through the discount window.
