BA162 Midterm Chapter 15

What happens when Gov restricts credit controls

People are discouraged from making big purchases, decrease economic activity

(1st Monetary tool) Open Market Operations

Purchase/Sales of Treasury Bills issued by Gov preformed daily to effect the supply of money in economy

(2nd FED responsibility) Regulatory Functions

Regulate banking institutions by establishing and determine banking rules, and ensure ALL rules are being followed by banks with surprise inspections

Certificates of Deposit (CDs)

Savings accounts that guarantee a depositor a SET interest rate over a specified interval as long as the funds are not withdrawn before the end of the period—six months or one year for example

Mutual Savings Bank

Similar to savings and loan associates, and like a credit union is owned by the people who use it, provides a safe place for the working classes savings

Credit Card fraud

Stealing a credit card and using it to buy goods with someone else's money (while consumers aren't usually responsible for paying them back, debit cards are harder to protect)

(4th FED Responsibility) Depository Insurance

Supervising the federal insurance funds that protect deposits of member institutions

(2nd Monetary tool) Reserve Requirement

The % of deposits that banking institutions must Hold in Reserve that are NOT available for loans and lending to businesses (guaranteeing safety of consumer money in case something bad happens)

(3rd FED responsibility) Check Clearing

The FED provides check processing on a huge national scale through "Check Clearinghouses" which handle all checks written in one city and deposited in another

(4th Monetary tool) Credit Controls

The authority to establish/enforce credit rules for financial institutions - Raising/lowering minimum down payment, and control amount of credit borrowing from stock market

(3rd Monetary tool) Discount Rate

The rate of interest the FED charges to loan money to any banking institution to meet reserve requirement (When FED wants to expand money supply, it lowers discount rates vise versa)

Store Value

The value of stored money (stuffed in sock drawer) is directly dependent on the health of the economy - Due to inflation buying power will reduce - Due to deflation buying power will increase

Brokerage Firms and Investment Banks

They Buy and Sell stocks/bonds/other securities for their customers and provide many financial services

The Credit CARD stands for

(Card accountability responsibility and disclosure)

Near Money

(Traveler's Checks, Money Orders, Cashier's Check) Financial institution issues them in exchange for cash, while promising to pay the issues amount at a later date with interest (Opposite of a loan for banks)

During ________to ________, markets collapsed under the weight of declining house prices

2007-2008, large banks had sinking capital, The FED bought up troubled assets from banks to bail them out, FED bought up mortgages and payed off debts to stimulate economy

Credit Card act of _______

2009, was passed to regulate credit card companies, by limiting credit to young adults so they don't go over, and gave more time to pay bills, as 40% of households use credit cards to pay for basic necessities

4) Divisibility

Units must be comparable for money to be effective such is the reason we use Coins, and have small bills that are divisible

Direct Deposit

Usually when people deposit their paychecks so they don't lose them (businesses can save $1.25 on each paycheck by paying their employees this way)

Discount Window

When banks borrow money from the FED, which is a higher interest rate to discourage banks from doing so

Check 21 Act

A 2003 law that allows banks and others to electronically process checks.

Measure of Value

allows money to serve as a common denominator to measure value of each persons yearly earnings or measure the value of a good

· National Credit Union Association (NCUA)

an agency that regulates and charters credit unions and insures their deposits through its National Credit Union Insurance Fund (insures each depositor's accounts up to $100,000 in one credit union)

Premium

an amount paid for an insurance policy.

Electronic Funds Transfer (EFT)

any movement of funds by electronic terminal, telephone, computer, or magnetic tape

Finance companies

businesses that offer short-term loans at higher rates of interest than banks and are LAST Resort for individuals/businesses

Insurance Companies

businesses that protect their clients against financial losses from certain specified risks (death, accident, and theft, for example) in exchange for a fee(Premium)

Automated Teller Machine (ATM)

dispenses cash, accepts deposits, and allows balance inquiries and cash transfers from one account to another

Federal Deposit Insurance Corporation (FDIC)

established in 1933, and is a government agency that insures customer deposits if a bank fails

Pension Funds

managed investments set aside by individuals, corporations, unions, and some nonprofit organizations to provide retirement income for members (Interest from these can be tax-free)

Store of Value

money allows you to store purchasing power for the future

automated clearinghouses (ACHs)

permit payments such as deposits or withdrawals to be made to and from a bank account by magnetic computer tape (Used to deposit employees paychecks directly to their account)

Mutual Fund

pools the money of many investors - its shareholders - to invest in a variety of securities (Large amount of investors minimizes risk in investment)

T-bills (treasury bills)

short-term debt obligations the U.S. government sells to raise money

Commercial Banks

the largest and oldest of all financial institutions, relying mainly on checking and savings accounts as sources of funds for loans to businesses and individuals

Credit Union

A financial institution owned by its depositors that provides savings and checking accounts with deals and low fees as they usually have something in common (ex: Military credit union for veterans and family only)

Certificate of Deposit

A type of savings account that requires a minimum amount of money deposited in the account for (a month,year,7years)

Dodd-Frank Act

Added regulations and raised reserve requirement for banks, and limited high-risk activities

Credit Card debt

Allow you to promise to pay at a later date, they also normally have transaction fees of 2-5%, most expensive way to borrow money

Medium of exchange

Before Paper(Fiat) money, people would barter for goods by trading goods and services for other goods and services

Roth IRA

Beneficial to young people who can set money aside for a LONG time

Near Money

Cashiers checks, money orders, travelers checks

Banking Institutions include _________

Commercial Banks, Savings and Loan associates, credit unions and mutual savings banks

Shadow banking

Companies preforming Unregulated banking functions

Goal of the FED

Create an economic environment capable of long-term economic growth

Reward Cards

Credit cards that carry a benefit to the user to get deals and savings is they buy from a certain company

Increase Discount Rate leads to

Decrease money supply and Decrease economic activity

Debit Card

Direct and immediate payment from checking account to the owner of the card, or to a person of their choice

Nonbanking Institutions

Diversified Firms Insurance Companies Pension Funds Mutual Funds Money Market Funds Brokerage Firms & Investment Banks Finance Companies

(FED) The Federal Reserve Board established in ________

Established in 1913, to regulate nations banking, organized into 12 regions of the U.S.

Savings and Loan Associates (S&L)(Thrifts)

Financial institutions that offer savings accounts and make LONG-TERM loans for residential mortgages

Savings Account (Time deposit)

Funds that can NOT be withdrawn without a 2-3 day notice, with limits on number of withdraws per period

Fiscal Policy

Government policy that attempts to manage the economy by controlling taxing and spending.

(1st Fed Responsibility) Monetary Policy

How the FED controls the supply of money available in the economy to help balance supply/demand

Money Market accounts

In exchange for slightly higher interest rates, owner of the account can write only a limited number of checks per month

What happens when Gov decreases discount rate

Interest rates decrease, money supply increases, economic activity increases

What Happens when Gov raises Discount rate

Interest rates increase, money supply decreases, economic activity slows

Social Security

Largest fund and is publicly funded by taxes and used to help older generation (as one day the younger generation will help you when your old)

Money Market Fund

Limited checks per month, and invests in SHORT-term debt securities issued by gov, offer higher interest rates

6 Characteristics of Money (APSDDD)

1) Acceptability 2) Profitability 3) Stability 4) Divisibility 5) Durability 6) Difficulty to Counterfeit

Money serves 3 important functions

1) Medium of exchange 2) Measure of Value 3) Store Value

The FED has 4 major responsibilities

1) Monetary Policy 2) Regulatory functions 3) Check Clearing 4) Deposit Insurance

4 tools of monetary policy (CORD)

1. Credit Controls 2. Open market operations 3. Reserve Requirement 4. Discount Rate

Money/Currency

Anythings excepted in exchange for goods and services (fish, rocks, clothes have all been used as money)

What happens when Gov increases reserve requirement

Banks make less loans, money supply decreases, economic activity slows

What happens when Gov decreases reserve requirement

Banks make more loans, money supply increases, economic activity increases

5) Durability

Money must be durable enough to last about 6 years before being replaced by the gov

2) Portability

Money must be easily moved from one location to the other, and easily transportable in your pocket or wallet (More U.S. currency is in circulation outside the U.S. than inside)

3) Stability

Money must be stable and maintain its declared value over time, stability allows people to save their money without worry of the value immensely decreasing

Checking account (Demand Deposit)

Money stored in an account that can be withdrawn instantly with no advance notice

Monetary policy controls_____________ and _________________

Money supply and Interest Rates

What happens when Gov Sells Gov securities

Money supply decreases, economic activity slows

What happens when Gov buys up Gov securities

Money supply increases, economic activity increases

Fiat Money

Money that has no real value (its just a piece of paper) except for the value placed on it by the government

What happens when Gov relax's credit controls

More ppl encouraged to make major purchases, increasing economic activity

1) Acceptability

Most important characteristic, as consumers MUST be able to trust that everyone will accept their money for its listed value

6) Difficulty to Counterfeit

Must be very hard to replicate illegally or else everybody would do it

Diversified Firms

Nonfinancial firms that help finance their customer's purchases of expensive equipment

Cryptocurrency

Not backed by the Gov so it has a fluctuating price, such as Bitcoin