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ease in which an asset can be converted into the most widely accepted and easily spent way of cash with little or no loss in purchasing power.
What are the 3 functions of $ supply?
- Medium of exchange
- Unit of account
- Store of value
U.S Mint & Bureau of Engaving & Printing are both part of?
U.S Dept of treasury
Means that the face value is intrinsic ( the value of the physical material is not worth more than itself. (cannot melt 5 cent coin and go cash it for 10 cents)
What make up Thrift institutions?
Commercial Banks (listed below) which collectively are known as: Thrift Institutions
- Savings & Loan Associations:
- Mutual Saving Banks
- Credit Unions
What do savings & loan associations and mutual savings bank do?
Accept the deposits of households & businesses and then use the funds to finance housing mortgages and to provide other loans.
What do credit unions do?
accept deposits from and lend to members who are a group of people who work for the company.
Currency held by the U.S treasury, FR banks, commercial banks, checkable deposits, and _______ ______ are excluded from M1 & other measures of MS.
To avoid double counting
What are checkable deposits?
Are debts of commercial banks and thrift institutions.
What the things give $ its value?
- Legal Tender
- Relative Scarcity
What are some legal noncash payment forms?
- cashiers check
- money order
- credit cards
What do FDIC & NCUA do?
Insure up to 250,000 at commercial banks & thrifts.
The value of the dollar (domestic purchasing power) is inversely related to ___________________.
The banking crisis of 1907 motivated congress to appoint ______ _____ _____ to study monetary and banking problems. What was the result?
- National Monetary Commision
- Result: Federal Reserve Act of 1913
Pres Appoints 7 members w/ Senate approval
Pres Also Selects.....
- staggered 14 years where 1 board member is replaced every 2 years.
- Pres also selects chairperson & vice-chairperson -- 4 Year Terms
Fed lent over ____ billion to US banks & thrifts after 9/11
FOMC has __ individuals of which are __ from BOG, president of __ ____ federal reserve bank, and 4 of the remaining presidents of the federal reserve banks on a 1 year rotating basis.
- New York Federal Reserve.
FOMC does what?
Direct purchases and sale of government securities (bills, notes, bonds) in open market.
WHat three organizations regulate thrift institutions?
- National Credit Union Association (NCUA)
Fed Res Functions
- Issuing currency
- Setting Reserve Requirements
- Emergency lender of last resort (discount rate)
- Check Collection
- Acting as fiscal agent
- Supervising Banks
- Controlling the MS
What others supervse banks besides the fed?
- Individual States
- Office of the Comptroller of currency
Sub prime mortgage rates
high interest rate loans to home buyers with higher than average credit risk.
it is AKA?
Process of slicing up and building groups of loans, mortgages, corporate bonds, or other financial debts into distinct new securities.
Shadow banking system.
Securitzation plunged by mortgaged back securities
Countrywide saved by BOFA
JP Morgan took over Washington Mutual
Wells Fargo Rescued Wachovia Bank
____ billion in emergency loans in 2008
Here are the 7 LENDER OF LAST RESORT FED CREDIT FACILITIES
Primary Dealer Credit Facility (PDCF)
Term Securities Lending Facility (TSLF)
Asset-backed commercial paper $ market mutual fund liquidity facility
Commercial Paper Funding Facility (CPFF)
Money Market Investor Funding Facility (MMIFF)
Term-Asset-backed securities Loan Facility (TALF)
Interest Payments on reserves
- (PDCF) -Primary dealers (16 firms)- overnight loans provided but provide collateral.
- (TSLF)) Lends Securities to primary dealers for 1 month bid system
- Asset-backed commercial paper $ market mutual fund liquidity facility
- (CPFF) Purchases commercial paper to support short-term credit busi.
- (MMIFF) Support to private sector ensuring US liquidity of market mutual funds.
- Interest Payments on reserves
What are financial services industry?
commercial banks, thrifts, insurance companies, mutual funds, pension funds, security firms, and investment banks.
Wall street reform and consumer protection act
- Eliminated office of thrift supervision
- Created Financial Stability Oversight Council
- Created process for Gov to sell failing financial institutions
- Provide Regulatory oversight of mortgage backed securities
- Rquired asset-backed securities to retain a portion of those securities so the seller shares part of the risk
- Creation of Bureau of Consumer Financial Protection
Transactions demand for $ what is it?
It varies directly with...
The demand of $ as a medium of exchange
Asset demand for $
People like to hold some of their $
Capital loss example
- Price of a bond falls
- Bondholder sells bond prior to payback date of the principle will suffer a capital loss
Increase in nominal GDP means that the public wants to hold a larger amount of $ for transactions.
Decrease in Nominal GDP will shift total demand curve to the left.
Total demand for money l,
- Treasury Deposits
- Federal Reserve otes
What are the tools of the monetary policy?
- Open market operations
- Reserve ratio
- Auction Facility
- Discount Rate
Open Market Operations
(most important day to day to influence MS)
Connsists of buying government bonds (securities) from or selling to commercial banks & general public.
- Fed Buys securities = ^ reserves for bank
- (which then ^ lending ability of bank
- Fed Sells Securities = v reserves for bank
- (which then v lending ability of bank)
Losing Excess reserves means
Diminishing their ability to create money by lending.
Lowering Reserve Ratio.........
- Required reserves would decline:
- Excess Reserves would Increase:
- Ex: from 20% to 10% of 20000
- AR= 5,000 --> Money creating potential 30K
- RR= 4,000 --> RR=2,000
- ER= 1,000 --> ER=3,000
The interest rate fed charges to commercial banks is called discount rate which basically the commercial banks borrow against themselves by collateral.
Reserve ratio affects system in 2 ways
- It can change amt of Excess reserves
- It can change the size of monetary multipier
What happens when commercial banks lend new reserves?
- Fed hold 2 per month
- Banks bid to borrow for 28 or 84 day periods
- Beneficial to fed so they can increase overall level of reserves in banking system
Federal Funds Rate
RAte of interest that banks charge one another on overnight reserves made from temporary exess reserves
Expansion monetary policy
Lowers interest rates to increase spending and borrwoing which in return will increase aggregate demand and expand real output
Restrictive Monetary Policy
This policy will increase interest rates to reduce borrowing and spending and in return will decrease Money supply and hold down price level increases.
Fed Has 2% target rate of inflation
^ MS = Expansionary monetary policy to reduce interest rates
v MS = Restrictive monetary policy to increase interest rates, reduce investment, and spending and inflation.
adding more cash to banks has no additional positive effect on lending, borrowing, investment, or aggregate demand because banks dont loan it out!