Economics Ch. 13-15

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Economics Ch. 13-15
2010-11-14 16:50:21

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  1. Three functions of money:
    • 1. medium of exchange
    • 2. unit of account
    • 3. store of value
  2. M1 includes:
    paper currency + checkable deposits
  3. What is the largest part of the M1 money supply?
    Checkable deposits
  4. Two main types of financial institutions:
    Commercial banks and thrift institutions (including S&Ls, credit unions)
  5. M2 includes:
    M1 + savings deposits, market deposit accounts (MMDAs), small time deposits, and money market mutual funds (MMMFs).
  6. M3 includes:
    M2 + large time deposits
  7. Why are credit cards not considered money?
    They act as a short loan, but have no value.
  8. Money is a debt of what?
    the Federal Reserve Banks
  9. What three reasons give money its value?
    • 1. acceptability
    • 2. legal tender ("designated currency")
    • 3. relative scarcity
  10. What is the relationship between price levels and the purchasing power of the dollar?
  11. What two factors stabilize the value of money?
    • 1. appropriate fiscal policy
    • 2. intelligent management of the money supply
  12. What are the three types of demand for money?
    • 1. transactions demand
    • 2. asset demand
    • 3. total money demand
  13. Transaction Demand
    the need of money to pay for things
  14. Asset Demand
    the need to hold stocks, bonds, etc.
  15. Total Money Demand
    the inverse relationship between interest rate and amount of money people want to hold
  16. Money Market
    the demand for money versus the supply of money
  17. What is the relationship between interest rates and bond prices?
  18. Federal Reserve System
    controls the lending activity of the nation's banks
  19. Federal Open Market Committee
    sets the Fed's monetary policy and directs purchases/sales of govt securities
  20. Federal Reserve Banks
    collectively serve as the nation's central bank ("banker's bank")
  21. What are the seven functions of the Federal Reserve?
    • 1. issue currency
    • 2. set reserve requirements/hold reserves
    • 3. lend money to banks
    • 4. provide for check collection
    • 5. act as fiscal agent
    • 6. supervise banks
    • 7. control money supply
  22. Balance Sheet of a Commercial Bank
    a statement of assets and claims on assets that summarizes the financial position of the bank at a certain time (assets = liability + net worth)
  23. Fractional Reserve System
    a fraction of the total money supply is held in reserves as currency
  24. What are two characteristics of a fractional reserve banking system?
    • 1. money creation and reserves
    • 2. bank panics and regulation
  25. Eight Steps in the Creation of a Single Commercial Bank
    • 1. acquire a charter; sell equity shares
    • 2. acquiring property and equipment
    • 3. accepting deposits
    • 4. depositing reserves in a Fed Reserve Bank
    • 5. clearing a check drawn
    • 6. granting a loan
    • 7. repaying a loan
    • 8. buying govt securities
  26. Required Reserves
    amount of funds equal to a specified percentage of the banks own deposit liabilities
  27. Reserve Ratio
    reserve ratio = commercial bank's required reserves/commercial bank's checkable deposit liabilities
  28. Excess Reserves
    actual reserves - required reserves
  29. What do required reserves help the Fed to control?
    The lending ability of commercial banks; facilitating of the collection/clearing of checks
  30. How does giving a loan and paying back a loan create and destroy money?
    • Makes: by considering an IOU a form of payment
    • Destroys: when the loan is paid back the IOU is returned because real money has been deposited in its place
  31. Monetary Multiplier
    magnifies a change in initial spending into a larger change in GDP (1/req reserve ratio)
  32. The balance sheet of the Fed Banks is made up of these fives things:
    • Assets:
    • 1. securities
    • 2. loans to commercial banks
    • Liabilities:
    • 3. reserves of commercial banks
    • 4. Treasury deposits
    • 5. outstanding Fed Reserve Notes
  33. Open Market Operations
    the buying/selling of bonds from/to commercial banks and general public
  34. When the Fed banks buys securities in the open market, commercial banks' reserves increase
  35. When the Fed banks sell securities in the open market, commercial banks' reserves decrease
  36. Discount Rate
    the interest rate charged by Fed banks to commercial banks
  37. Easy Monetary Policy
    • Increase: excess reserves, money supply, investment spending, aggregate demand, and real GDP
    • Decrease: reserve ratio, discount rate, and interest rate
  38. Tight Money Policy
    • Increase: reserve ratio, discount rate, and interest rate
    • Decrease: excess revenue, money supply, investment spending, aggregate demand, and inflation
  39. Two strengths of monetary policy:
    • 1. speed and flexibility
    • 2. isolation from political pressure
  40. Three weaknesses of monetary policy:
    • 1. less control?
    • 2. change in the velocity of money
    • 3. cyclical assymetry
  41. Velocity of money
    the number of times per year the average dollar is spent on goods/services
  42. Cyclical Assymmetry
    the unreliability of monetary policy to push an economy from a recession
  43. Fed Funds Rate
    the interest rate that banks charge one another on overnight loans of reserves
  44. Prime Interest Rate
    interest rate banks charge their most credit worthy customers
  45. Monetary Net Export Effect
    Easy: decreased interest rate = decreased foreign demand for the dollar; thus the dollar depreciates and net exports increase

    Tight: increased interest rate = increased foreign demand for the dollar; thus the dollar appreciates and net exports decrease
  46. What three things does an easy money policy do?
    • 1. alleviates unemployment
    • 2. alleviates sluggish growth
    • 3. corrects balance of trade deficit
  47. What two things does a tight money policy do?
    • 1. alleviates inflation conflicts
    • 2. corrects balance of trade deficits