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the resources a bank's owners have put into the institution
a government regulation specifying a minimum amount of bank capital
an institution designed to oversee the banking system and regulate the quantity of money in the economy
money that takes the form of a commodity with intrinsic value
Ex: gold, silver, copper, peppercorns
the paper bills and coins in the hands of the public
balances in bank accounts that depositors can access on demand by writing a check
the interest rate on the loans that the fed makes to banks
federal funds rate
the interest rate at which banks make overnight loans to one another
(Fed) the central bank of the United States
money without intrinsic value that is used as money because of government decree
a banking system in which banks hold only a fraction of deposits as reserves
the use of borrowed money to supplement existing funds for purposes of investment
the ratio of assets to bank capital
the ease with which an asset can be converted into the economy's medium of exchange
1. Cash is the most liquid asset because it be trade for another good or service the fasted.
2. Checking accounts and ATM debit cards are the second form of Liquidity
3. Houses are examples of illiquid: Can only covert into cash by selling it.
medium of exchange
an item that buyers give to sellers when they want to purchase goods and services
the setting of the money supply by policymakers in the central bank
- 1. Aim to move economy to full employment
- 2. Increase output to the economy potential
- 3. Maintain price stability
the set of assets in an economy that people regularly use to buy goods and services from other people
without money trade would require barter the exchange of one good for a service for another
the amount of money the banking system generates with each dollar of reserves
Formula = 1/required reserve ratio
the quantity of money available in the economy
the purchase and sale of U.S. government bonds by the fed
Fed Committee meet every 6 weeks
the fraction of deposits that banks hold as reserves. The rate is set by the Feds
regulations on the minimum amount of reserves that banks must hold against deposits
Required Reserves = required reserve ratio x total deposits
deposits that banks have received but have not loaned out
most hold as cash in vault or deposit at the feds
store of value
an item that people can use to transfer purchasing power from the present to the future
unit of account
the yardstick people use to post prices and record debts
Two Kinds of Money
Intrinsic Value: Things like gold or precious metals
Fiat Money: or Token Money: Has no intrinsic value. It is used as money because of goverment decree. (Money/Dollar Bills). Most countries use Fiat Money for trade.
M1, M2, and M3
Currency in Circulation (Money) + Demand deposits (Bank deposits that can be taking out)
=M1 + savings deposit + small time deposits (100,000 or Less) + money market mutual funds
=M2 + Large Denomination time deposits
Wealth or Net Worth
is the total value of assets minus the total value of Liabilities
Financial Intermediaries that serve three purposes
1. Accept deposit
2. Make Loans
3. Earn a profit
Bank Liabilties & Assets
1. Primary liability of depository institutions= deposit in checking accounts/Checkable deposit
- 2. Assets = Vault Cash at the Bank and deposits at the Feds
an institution that transfer money between banks.
In the US the Feds serve as the clearing house.
Simplified accounting statement that shows bank assets and liabilities.
Excess reserves= Total Reserves - Required reserves.
The maximum amount of loans an individual bank can create is equaled to its excess reserves
expansionary Monetary Policies
Action by the Central bank that increases the money supply and reduce the interest to stimulate aggregate demand
Contraction Monetary Policies (tight money)
Actions that decrease the money supply and increase the interest rate to reduce aggregate demand
Term Auction Facility (TAF)
Banks bid to borrow money from the fed. Funds goes to the highest bidder willing to pay the higher interest rate.
Open-market operations effects
- When Feds buy US Bonds and Securities it
- increases the money supply and reduce the interest to stimulate aggregate demand
- When Feds Sales US Bonds and Securities it
- decrease the money supply and increase the interest rate to reduce aggregate demand
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