Chapter 13

Two Most Common Measures of Money: M2

M1 plus other assets, including deposits in savings and loans accounts and money market mutual funds (savings deposits are the largest component of M2)

The Federal Reserve: central bank

a banker's bank (provides loans to banks): an official bank that controls the supply of money in a country

The Federal Reserve: lender of last resort

a central bank is the lender of last resort, the last place, all others having failed, form which banks in emergency situations can obtain loans

Different Types of Monetary Systems: gold standard

a monetary system in which gold backs up paper money

Different Types of Monetary Systems: fiat money

a monetary system in which money has no intrinsic value but is backed by the government - people just accept currency; unstable b/c people could lose confidence in the US dollar

Different Types of Monetary Systems: commodity money

a monetary system in which the actual money is a commodity, such as gold or silver (in war used cigarettes)

Three Properties of Money (2) money serves as a Unit of Account

a standard unit in which prices can e stated and the value of goods and services can be compared (*not "moola" b/c can't use it to pay taxes*)

How did the Fed Manage to Keep the Financial System in Operation Immediately Following the Attacks on 9/11

allowed banks to borrow more, allowed float to increase sharply (lending a lot of money), purchased gov securities (bonds), thereby preventing a financial panic

How Banks Create Money: balance sheet

an account statement for a bank that shows the sources of tis funds (liabilities - money you owe back to someone else) as well as the sues of its funds (assists - the IOU and income stream you get)

How Banks Create Money: excess reserves

any additional reserves that a bank hold above required reserves

Three Properties of Money (1) money serves as a Medium of Exchange

any item that buyers give to sellers when they purchase goods and services

Why would a bank want to lend out everything they could (no excess reserves)?

b/c that's how they make their money!

Why do People Generally Only Hold Liquid Assets if They Plan to Spend Them?

b/c the opportunity cost of having cash is not getting the rate of return you'd have gotten if you'd have put your money in savings

Fractional Reserve

bank holds a fraction of your wealth at the bank and the rest is being lent out - you get compensated for this risk and less liquid by giving you a deposit rate

Different Types of Monetary Systems: gold standard - problem

causes huge distortions if you find more gold

How did the Fed Successfully Respond to the Collapse of Major Financial Institutions in 2008

developed new programs that bypassed the banking system b/c the banks were just keeping the money in reserves so it wasn't helping at all. purchased the short term debt of corporations, extended loans to money market funds, and payed interest on reserves held at the fed

Functions of the Federal Reserve: (1) the fed supplies currency to the economy

fed tells treasury how much money to print; also provides currency to back all electronic and checking deposits

Functions of the Federal Reserve: (3) the fed holds reserves from banks and other depository institutions and regulates banks

holds reserves form banks, and regulates banks to ensure they are complying with rules and regulations; ensures financial system is safe

The Structure of the Federal Reserve: federal reserve bank

one of 12 regional banks that are an official part of the Federal Reserve System (banks regulated by government - still money making banks!) serve as a liaison b/w the Fed and the banks in their districts

The Independence of the Federal Reserve

politicians not in charge therefore not held politically accountable and can think long-term. chairperson of the board is required to report to Congress on a regular basis, but in practice, the fed makes its own decisions and later informs Congress.

Functions of the Federal Reserve: (2) the fed provides a system of check collection and clearing

responsible for making our system of complex financial transactions "work"; Fed makes sure Freda's banks receives the funds from Paul's bank when he writes her a check

Measurement of the Money Supply Helps Us Predict

spending (AD in the Keynesian model) and prices (in both models)

The Structure of the Federal Reserve: board of governors of the federal reserve

the 7-person governing body of the federal reserve system in Washington DC

Three Properties of Money (1) money serves as a medium of exchange - Barter is the Alternative

the exchange of one good or service for another - barter economies are very primitive; produce general needs and goods - can't save

How Banks Create Money: owners' equity

the funds provided to a bank by its owners

The Structure of the Federal Reserve: federal open market committee (FOMC)

the group that decides on monetary policy: it consists of the 7members of the board of governors plus 5 of 12 regional bank presidents on a rotating basis (internal checks and balances)

How Banks Create Money: reserves

the portion of banks' deposits set aside in either vault cash or as deposits at the Federal Reserve (for daily spending)

Three Properties of Money (1) money serves as a medium of exchange - Double Coincidence of Wants

the problem in a system of barter that one person may not have what the other desires - if i'm selling med services and you're selling fruit and I don't like fruit, then you don't get med services

Three Properties of Money (3) money serves as a Store of Value

the property of money that holds that money preserves value until it is used in an exchange

Functions of the Federal Reserve: (4) the fed conducts monetary policy

the range of actions taken by the Federal Reserve to influence the level of GDP or inflation

How Banks Create Money: reserve ratio

the ratio of reserves to deposits

Money Multiplier

the ratio of the increase in total checking account deposits to an initial cash deposit (a fall in cash deposits works in the opposite direction, decreasing the money supply)

How Banks Create Money: liabilities

the sources of funds for a bank, including deposits and owners' equity (the money I have to play with)

How Banks Create Money: required reserves

the specific fraction of their deposits that banks are required by law to hold as reserves

Two Most Common Measures of Money: M1

the sum of currency (cash) in the hands of the public, demand deposits, other checkable deposits, and traveler's checks (this used to be a very good predictor of spending) (currency is the largest component of M1)

How Banks Create Money: assets

the uses of the funds of a bank, including loans and reserves

Banks Are Financial Intermediaries

they affect long-run GDP and real wages by increasing the efficiency with which households lend to firms

Banks Affect the Money Supply

they create loans, which creates AD and short-run GDP. they affect prices as well

What is Money?

wealth we're using to buy stuff - don't want all wealth in money; want to minimize money b/c doesn't have a rate of return