Chapter 14: Money, Banking, and the Fed
What are the additional responsibilities the Fed has beyond monetary policy?
Additional responsibilities of the Fed include maintaining the money supply and the payments system, regulating and supervising banks, preparing consumer legislation, and serving as the federal government bank.
What are the advantages of having the Fed oversee the U.S. banking system?
Advantages of having the Fed oversee the U.S. banking system include monitoring its spending and preventing them from taking advantage of their power.
Explain why the National Banking System was created during the Civil War.
As the War dragged on, people feared that greenbacks might become worthless. In 1863, Congress enacted the National Currency Act, which created a National Banking System made up of national banks.
Study the cartoon on page 384. How does this cartoon spotlight the basic problem of a barter economy?
As the cartoon shows, trading in a barter economy can be different for those wanting to exchange goods for products they may use.
What are the components of the Federal Reserve System?
Components of the Federal Reserve System includes member banks, 12 district banks, and a board of govenors
How did experiences during and after the Revolutionary War affect banking in the United States?
During the Revolutionary War, nearly 250 million continental dollars were printed. By the end of the Revolution, continental currency had become worthless, and people did not trust the government to issue anything except coins. Banking became popular after the Revolution because the new Constitution allowed private banks to issue paper currency.
Identify the problems that existed with pre-Civil War currency.
First, each bank issued its own currency in different sizes, colors, and denominations. Second, banks were tempted to issue too many notes because they could print more money whenever they wanted. Third, counterfeiting became a major problem.
___ is the component of the money supply that acts as a medium of exchange.
M1
Examine the photo on page 394. What weaknesses in the banking system led to the actions pictured in this photo?
Many banks at the time did not offer deposit insurance for their customers. So when banks failed during the Great Depression, depositors lost all their savings.
Explain why member banks borrow from the Fed.
Member banks borrow from the Fed primarily to meet reserve requirements.
In what ways do you think modern technology has affected the functions of banks in the United States?
Modern technology has affected the functions of banks by putting a lot of services online that would normally be done in person such as deposits, transfers, withdrawals, etc. It also has opened banks up to cyber crimes.
Why and how does the Fed conduct monetary policy?
One of the most important functions of the Fed is to conduct monetary policy-changes in the money supply in order to affect the availability and cost of credit. When the Fed conducts its monetary policy, it changes interest rates by changing the size of the money supply.
Why was the "dollar" adopted as the basic monetary unit of the United States?
Pesos were known as "pieces of eight" because they were divided into eight subparts known as "bits". Because the pesos resembled the Austrian talers, they were nicknames "talers", which sounds similar to the word "dollar". This term became so popular that the dollar became the basic monetary unit.
___ gives the Fed the authority to extend truth-in-lending disclosures to consumers.
Regulation Z
Why would some people be more willing to accept commodity money rather than fiat money?
Some people would be more willing to accept commodity money rather than fiat money because commodity money can be used for other things other than money. For example, compressed tea leaves, or "bricks" could be used as Chinese money or as tea in ancient China.
How do the operations of the Fed compare to the operations of a normal bank?
The Fed is a privately owned, publicly controlled central bank of the United States whereas a normal bank is not subject to that regulation
Describe the role of the Board of Governors of the Fed.
The Fed is directed by a seven-member Board of Governors. The Board is primarily a regulatory and supervisory agency. It sets general policies for its member banks to follow and regulates certain aspects of state-chartered member banks' operations. It helps make policies that affect the level of interest rates and the general availability of credit. Finally, it reports to Congress annually and puts out a monthly bulletin that covers nation and international monetary matters.
Do you think the functions and characteristics of money are still intact when money is exchanged electronically? Why or why not?
The functions and characteristics of money are still intact when money is exchanged electronically. Electronic money is portable, durable divisible, and limited in supply. Also its a medium of exchange, serves as a measure of value and series as a store of value.
How does the system of fractional reserves "create" money?
Under a fraction reserve system, banks are required to keep only a portion of their total deposits in the form of legal reserves. Legal reserves consist of coins and currency that banks hold in their vaults, plus deposits at the Fed. The size of the reserves are determined by a reserve requirement. The result is a money supply that is several times larger than the total reserves of the banking system.
How do "tight money" and "easy money" impact the economy?
Under an easy money policy, the Fed expands the money supply, causing interest rates to fall. Under a tight money policy, the Fed restricts the size of the money supply. This tends to slow economic growth because higher interest rates normally encourage everyone to borrow and spend less.
measure of value
a function of money that allows it to serve as a common way to express value
store of value
a function of money that allows people to preserve value for future use
demand deposit account (DDA)
account from which funds can be removed by writing a check and without having to gain prior approval from the depository institution
monetary policy
actions by the Federal Reserve System to expand or contract the money supply in order to affect the cost and availability of credit
member bank
bank belonging to the Federal Reserve System
central bank
bank that can lend money to other banks in times of need
state bank
bank that receives its charter from the state in which it operates
In a ___ people rely on trade to obtain goods and services.
barter economy
bank holiday
brief period during which all banks or depository institutions are closed to prevent bank runs
The Fed serves as the ____ of the United States.
central bank
national bank
commercial bank chartered by the National Banking System
bank holding company
company that owns and controls one or more banks
M1
component of the money supply relating to money's role as a medium of exchange
M2
component of the money supply relating to money's role as a store of value
legal reserves
currency and deposits used to meet the reserve requiremet
national currency
currency backed by gov't bonds and issued by commercial banks in the National Banking System
A(n) ____ would expand the money supply and tend to lower interest rates.
easy money policy
If a bank has ___, it is able to make additional loans to customers.
excess reserves
legal tender
fiat currency that must be accepted for payment by decree of the gov't
____ is money that must be accepted by government decree.
fiat money
excess reserves
financial institutions's cash, currency, and reserves not needed for reserve requirements
reserve requirement
formula used to compute the amount of a depository institutions required reserves
quantity theory of money
hypothesis that the supply of money directly affects the price level over the long run
discount rate
interest rate that the Federal Reserve System charges on loans to the nation's financial institutions
prime rate
lowest rate of interest that banks charge their best customers
coins
metallic forms of money such as pennies, nickels, dimes, and quarters
tight money policy
monetary policy that results in higher interest rates and restricted access to credit
easy money policy
monetary policy that results in lower interest rates and greater access to credit
fiat money
money by government decree
specie
money in the form of gold or silver coins
medium of exchange
money or other substance generally accepted as payment for goods and services
commodity money
money that has an alternative use as an economic good
barter economy
moneyless economy that relies on trade or barter
The most popular and effective tool of monetary policy is that of ____.
open market operations
currency
paper component of the money supply, today consisting of Federal Reserve notes
gold certificate
paper currency backed by gold and issued between 1863-1934
silver certificate
paper currency backed by, and redeemable for, silver from 1878-1968
Federal Reserve note
paper currency issued by the Fed in use today
Federal Reserve System (Fed)
privately owned, publicly controlled central bank of the U.S
Regulation Z
provision extending truth-in-lending disclosures to consumers
member bank reserve (MBR)
reserves kept by member banks at the Fed to satisfy reserve requirements
open market operations
sales or purchases of U.S. government securities by the Fed
monetary unit
standard unit of currency in a country's money supply
bank run
sudden rush of depositors to withdraw all deposited funds, generally in anticipation of bank failure or closure
fractional reserve system
system requiring financial institutions to set aside a fraction of their deposits in the form of reserves
interest rate
the price of credit to a borrower