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Chapter 8- Money, Banking, Fed Reserve Systerm
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26
Economics
Undergraduate 2
12/13/2011

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Term
Money
-definition
-three functions
Definition
any commodity or token that is generally acceptable as a means of payment or of settling a debt
-means of payment: a method of settling a debt

Three functions
-Medium of exchange
-Unit of account
-Store of value
Term
Medium of exchange
Definition
any object that is generally accepted in exchange for goods and services- people with something to sell will always accept as payment (ex money, credit)
-overcomes need for double coincidence of wants: people always want currency
Term
Unit of account
Definition
an agreed measure for stating the prices of goods and services (opportunity cost stated in dollar amount, not what you have to give up)
Term
Store of value
Definition
can be held and exchanged later for goods and services- why it can serve as means of payment (other ex: house, car)
Term
Two official measures of money
Definition
-M1
-M2
Term
M1
Definition
Measure of money that consists of currency and traveler's checks plus checking deposits owned by individuals and business- all means of payment

Does not include:
-currency held by banks
-currency and checking deposits owned by the US governemnt
Term
M2
Definition
Measure of money that consists of M1 plus time, saving deposits, money market mutual funds, and other deposits (M2 includes M1)
Term
Difference between M1 & M2
Definition
..
Term
Depository institution
-three types
-four benefits provided
Definition
a financial firm that takes deposits from households and firms.
-deposits are components of M1&M2

Three types: commercial banks, thrift institutions, money market mutual funds

Benefits:
-creating liquidity
-lowering the cost of borrowing
-lowering the cost of monitoring borrowers
-pooling risk
Term
Commercial Banks
Definition
firm that is licensed to receive deposits and make loans
Term
Thrift institution
Definition
savings and loan associations, saving banks, and credit unions are thrift institutions
Term
Money Market Mutual Funds
Definition
fund operated by a financial institution that sells shares in the fund and holds assets such as US Treasury bills and short-term commercial bills
-its shares act like bank deposits
Term
Federal Reserve System (Fed)
-central bank
-monetary policy
Definition
the central bank of the United States

-central bank: a bank's bank and a public authority that regulates a nation's depository institutions and conducts monetary policy

-monetary policy: it adjusts the quantity of money in circulation and influences interest rates
Term
The structure of the Fed (three key elements)
Definition
-The Board of Governors
-The regional Federal Reserve banks
-The Federal Open Market Committee
Term
The Board of Governors
Definition
-Seven member board appointed by the President of the US and confirmed by the Senate that governs the Fed
-members have 14 year (staggered) terms- one seat becomes vacant every two years
-Pres appoints one board member as chairman every four years, currently Ben Bernanke
Term
The regional Federal Reserve banks
Definition
-nation divided into 12 Federal Reserve districts
-each provides check-clearing services to commercial banks and issues bank notes
-Bank of New York- implements the Fed's policy decisions in the financial markets
Term
The Federal Open Market Committee (FOMC)
Definition
-the main policy making organ of the Federal Reserve System

Voting members:
-chairman, other six members of the Board of Governors
-The presidents of the Federal Reserve Bank of NY
-The presidents of the other regional Federal Reserve banks (rotating basis- only four vote)

-Meets approx. every six weeks to review the state of the economy and to decide the actions to be carried out by the New York Fed
Term
Feds two main assets
Definition
-US government securities
-Loans to depository institutions
Term
Fed's two main liabilities
Definition
-Federal Reserve Notes
-Depository institution deposits
Term
How Fed influence on the quantity of money and interest rates
-three tools it uses
Definition
adjusts the quantity of reserves available to the banks and the reserves the banks must hold

How it does this:
1)conducting open market operations: purchase or sale of security by Fed in Loanable funds market
2) Making last resort loans: bank is short of reserves, borrow from fed
3)setting required reserve ratio: minimum percentage of deposits that depository institutions are required to hold as reserves
Term
Monetary base and Fed buying and selling of securities
Definition
-When Fed buys securities in an open market operation: monetary base increases
-When Fed sells securities: decreases
Term
Banks create money by
Definition
Increase in monetary base (by Federal Reserve- excess reserves- bank lends excess reserves (creates new deposits)- quantity of money increases- new deposits are used to make payments- money that remains on deposit, some currency drain- excess reserves desired reserves increase

-when they call back a loan: destroys money
Term
The money multiplier
Definition
the ratio of the change in the quantity of money to the change in monetary base
Term
When the fed buys securities from a ban
Definition
the bank's reserves increase but its deposits do not change
Term
Quantity theory of money
Definition
the proposition that in the long run, an increase in the quantity of money brings an equal percentage increase in the price level
Term
For a commercial bank the term reserves refers to
Definition
the cash in its vaults and its deposits at Federal Reserve
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