Unit 4 Quiz 2 Vocab

Question 1

Bonds

Answer 1

Interest that could have been earned from holding other financial assets

Question 2

Bank reserves

Answer 2

Currency in bank vaults or on deposit with central bank NOT in circulation

Question 3

Fractional Reserve Banking

Answer 3

Banks only hold a fraction of their customer’s deposits in reserves because on a given day they only select few people willing to withdraw their money

Question 4

Reserve Requirements

Answer 4

Minimum fraction of deposits that banks must keep in their reserves- 0% since 2020, used to 10% traditional rate

Question 5

Bank run

Answer 5

When people worry bank might fail, they go to withdraw their money

Question 6

Deposit Insurance

Answer 6

FDIC guarantees up to 250,000 per account in case of bank failures

Question 7

Capital Requirements

Answer 7

Capital= assets- liabilities
A certain amount of capital is required to start a bank in order to cushion any losses

Question 8

Discount window

Answer 8

If banks fall short on their reserves they can take a short term loan from central bank where int. Rate. Banks pay is the discount rate

Question 9

Excess reserves

Answer 9

Any reserves a bank keeps above and beyond the required reserves

Question 10

Money multiplier

Answer 10

How much money is created by one dollar of excess reserves

Question 11

Monetary base(MB or M0)

Answer 11

Currency in circulation and bank reserves(all the cash)

Question 12

Central bank

Answer 12

Institution that regulates and oversees the banking system and controls the monetary base

Question 13

Conduct monetary policy

Answer 13

Done by Federal open market committee, stabilization policy, aims for price stability in Econ, and aims to keep Econ. At full employment

Question 14

Expansionary vs contractionary policy

Answer 14

Govt. policy intended to raise AD fix recessionary gaps, vs policy to decrease AD and fix inflationary gaps

Question 15

Monetary Policy

Answer 15

Central bank’s policies that involve influencing nominal interest rates to work toward their macroeconomic goals of price stability and full employment

Question 16

Limited Reserves vs Ample Reserves Framework

Answer 16

Reserves are not overly abundant in banking system, central banks implement interest rate changed by changing excess reserves and money supply

Reserves are overly abundant, changing excess reserves doesn’t lead to changes in NIR, used by US I by Federal Reserve