ECON Money and Banking (Chapter 14)

Use an equation to relate the purchasing power of money and the price level

$V= 1/P To find the value of the dollar $V, divide 1 by the price level P expressed as an index number (in hundredths)

Describe the framework of the Federal Reserve.

-board of governors -federal reserve banks -federal open market committee

Explain why money is debt in the U.S. economy and who holds that debt.

-federal reserve notes are debt of Federal Reserve banks -checkable deposits are debt of commercial banks -monetary authorities manage this debt -money cant be converted to gold or silver

Explain what role government plays in stabilizing the purchasing power of money.

-the government tries to keep supply stable with appropriate fiscal policy -Monetary policy tries to keep money relatively scarce to maintain its purchasing power, while expanding enough to allow the economy to grow

Discuss the relationship between the Federal Reserve and commercial banks and thrifts.

-there are about 6,000 commercial banks. They are privately owned and consist of state banks (three-fourths of total) and large national banks (chartered by the Federal government) -thrift institutions consist of savings and loan associations, credit unions, and mutual savings banks. They are regulated by the Treasury Dept. Office of Thrift Supervision, but they may use services of the Fed and keep reserves on deposit at the Fed. Of the approximately 8,500 thrift institutions, most are credit union

State three reasons why currency and checkable deposits are money and have value.

1) acceptable --as a medium of exchange 2) legal tender --in general, it must be accepted in repayment of debt, but that doesn't mean that private firms and government are mandated to accept cash 3)relative scarcity-- of money compared to goods and services will allow money to retain its purchasing power

The privately-owned and publicly-controlled central bank whose primary function is controlling the money supply and interest rates to promote general economic welfare is known as:

The Federal Reserve

Federal Reserve

The Federal Reserve System (the "Fed") was established by Congress in 1913 and holds power over the money and banking system. They act as bankers' banks by accepting reserve deposits and making loans to banks and other financial institutions.In making loans, the Federal Reserve is the "lender of last resort," meaning that the Fed is available to lend money should other avenues (e.g.,other commercial banks) not be available.

Describe the purposes of the Board of Governors of the Federal Reserve.

The central authority of the US money and banking system is the board. The US president, with the confirmation of the Senate, appoints the 7 board members. terms are 14 years and staggered so that one member is replaced every 2 years. The president selects the chairperson and the vice chairperson. They can serve 4 year terms and can be reappointed to new 4 year terms by the president. The long term provide the board with continuity, experienced membership and independence from political pressures that could result in inflation It is charged with overseeing the Federal Reserve Banks and with helping implement the monetary policy of the United States.

Describe the response of the Federal government and the Federal Reserve to the financial crisis.

Troubled Asset Relief Program (TARP) -Congress allocated 700 billion to make emergency loans to banks and business saved major banks and businesses from failure

The process of slicing up and bundling groups of financial debts such as loans or mortgages into distinct new securities that can be bought and sold is referred to as:

securitization.

The members of the Federal Reserve System whose primary responsibility is to meet regularly to direct the purchase and sale of government securities in the open market are part of:

the Federal Open Market Committee

12 Federal Reserve Banks

Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco

Which of the following is part of the U.S. money supply?

Currency in the cash register at Runza. Checkable deposits of the government (specifically, the U.S. Treasury) or the Federal Reserve that are held by commercial banks or thrift institutions are excluded from the money supply. This exclusion is designed to enable a better assessment of the amount of money available to the private sector for potential spending. Currency held in the cash register of a business would be part of the money supply

Securitazation

Securitization is the process of slicing up and bundling groups of loans, mortgages, corporate bonds, or other financial debt into new securities.

Explain why the Federal Reserve Banks are central, quasi-public, and bankers' banks.

Decentralize central banks 12 banks across nation for diversity Quasi-public banks -the 12 banks are these- each bank is owned by private commercial banks in its region, but have public control Banker's bank -perform same function as banks do -the system has 12 districts, each with its own district bank and two or three branch banks. They help implement Fed policy and are advisory -Each is quasi-public: it is owned by member banks but controlled by the government's Federal Reserve Board, and any profits go to the US Treasury -They act as bankers banks by accepting reserve deposits and making loans to banks and other financial institutions

Federal Reserve Act of 1913

The Fed was created to: - influence the supply of money and credit -regulate and supervise finaical institutions -be banking and fiscal agent for the US government

Discuss how inflation affects the acceptability of money.

Excessive inflation may make money worthless and unacceptable. -Worthless money leads to use of other currencies that are more stable -Worthless money may lead to barter exchange system

Distinguish between credit cards and money.

Is credit card money? no, it is a short term loan to a buyer from a credit card company loan will be paid off with a checkable deposit, which is money

Give an M2 definition of money and describe its components.

M1 + three other items: savings deposits, including money market deposit accounts (MMDA) small time deposits ... less than $100,000 money market mutual funds held by individuals (MMMF) held at brokerage

List and explain the three functions of money.

Medium of exchange:Money can be used for buying and selling goods and services. Unit of account:Prices are quoted in dollars and cents. Store of value: Money allows us to transfer purchasing power from present to future. It is the most liquid (spendable) of all assets, a convenient way to store wealth.

Which of the following best illustrates the medium of exchange function of money?

You pay for your oil change using currency. Money as a medium of exchange that is usable for buying and selling goods. When you exchange currency for an oil change the function of money is medium of exchange.

Whenever the Kerry family receives change from a purchase, it goes into a jar to be used in the summer as spending money for the family vacation. The primary function served by the money in the jar is as:

a store of value. the money is being saved for a future use—it is being used to store value, or purchasing power, until the summer.

Discuss the functions of the Federal Open Market Committee (FOMC)

aids the Board of governors in conducting monetary policy. The FOMC is made up of 12 individuals - the 7 members of the board of governors - the president of the NY federal reserve bank - 4 of the remaining presidents of the federal reserve banks on a 1-year basis They meet regularly to direct the purchase and sale of government securities (bills, notes, bonds) in the open market in which such securities are bought and sold on a daily basis.

The Federal backing for the money in the United States primarily comes from:

controlling the supply of money to keep the value of money relatively stable over time.

If the price index rises from 100 to 155, the value of dollar will:

fall by 35 percent The formula is $V = 1/P, where P is the price index expressed as a decimal. Thus 1/1.55 = $0.65. A rise in the price level of 55 percent (from 100 to 155) will reduce the value of the dollar from $1 to $0.65, a decline of 35 percent in value

Why was the Federal Reserve created?

in response to US bank failures and financial crises in early 1900s (especially in 1907) Provided a national or centralized system for controlling money provided a national system for clearing checks

Give an M1 definition of money and describe its components.

includes currency and checkable deposits -currency (coins and paper money) in the hands of the public - all checkable deposits (all deposits in commercial banks and "thrift" or savings institutions on which checks of any size can be drawn

A decrease in the general price level

increase the purchasing power of money, fewer dollars are needed to purchase goods and services

monetary policy

is the process by which the monetary authority of a country, typically the central bank or currency board, controls either the cost of very short-term borrowing or the monetary base, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency.

Explain the seven major functions of the Federal Reserve System.

issues currency (paper money) Set reserve requirements and bank reserves Lend money to banks and thrifts Clear checks be the fiscal agent for government supervise financial institutions Regulating money supply (monetary policy)

Which of one of the following is NOT one of the functions of the Fed?

minting U.S. coins and printing U.S. paper currency

An institution that collects savings from workers throughout their working years and then buys stocks and bonds with the proceeds and make monthly retirement payments is known as a:

pension fund.

Discuss the main problems that led to the financial crisis of 2007 and 2008

the US financial system malfunctioned, worse since Great Depression - a national problem with mortgages (many went bad) - led to defaults on investments backed by mortgages - led to a tightening of credit and lending (less than C & I) - led to a reduced economic activity (fall in GDP) result - shock to the system, a recession easy mortgage lending lending to higher-risk borrowers mortgages that went bad as times got tough losses on investments related to mortgage loans tightening the credit in the economy because of fear

When the user of a credit card pays off her balance at the end of a month,

the payment is made using money from a checking account.

One of the contributing factors to the financial crisis of 2007 and 2008 was:

underestimating a moral hazard problem.