Economics Ch 14, 15, 16

cyclical asymmetry

"pushing on a string" economists say that monetary policy may suffer from it: monetary policy would be ineffective at pushing aggregate demand to the right

monetary multiplier

(checkable deposit multiplier): defines the relationship between any new excess reserves in the banking system and the magnified creation of new checkable-deposit money by banks as a group. The reserves and deposits lost by one bank become reserves of another bank (1 / reserve ratio)

Fed Functions

- Issuing currency - Setting reserve requirements and holding reservers - Lending to financial institutions and serving as an emergency lender of last resort - Providing for check collection - Acting as fiscal agent - Supervising banks - Controlling the money supply

Savings Account

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M2

1 Savings deposits, including money market deposit accounts 2 Small-denominated (less than $100,000) time deposits 3 Money market mutual funds held by individuals

Checkable Deposits

49% of M1; , money deposited in a bank that can be withdrawn at any time by presenting a check;

Money

A Standard Value, a medium of exchange, a store of value

What is the Fractionale Reserve System

A banking system in which only a fraction of bank deposits are backed by actual cash-on-hand and are available for withdrawal. This is done to expand the economy by freeing up capital that can be loaned out to other parties.

Money market deposit account (MMDA)

An interest-bearing account that typically pays a higher interest rate than a savings account, and which provides the account holder with limited check-writing ability.

How do banks create and destroy money

Banks create money buy lending the money of deposits in their banks. The Gov. takes money out of the money supply by selling gov. securities to banks. The Fed. also prints money

What is Money in USA?

Coins, dollars,

reserve ratio

Commercial bank required reserves / commercial bank's checkable deposit liabilities) the ratio of the required reserves the commercial bank must keep on the bank's own outstanding checkable-deposit liabilities

What is FIAT money?

Currency that a government has declared, but is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material that the money is made of. Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on faith. Fiat is the Latin word for "it shall be".

What Backs-up our money?

Nothing, today there is no physical quantity that backs p our money, the worth is in the faith of the people and the government's ability to keep the value of money relatively stable. The US used to base its currency on the Gold Standard but ended that in 1971 because it was inefficient

Unit of Account

Society uses monetary units (dollars) as a yardstick for measuring the relative worth of a wide variety of goods, services, and resources

term auction facility

The fourth tool for altering bank reserves. The Fed holds two auctions each month at which banks bid for the right to borrow reserves for 28-day and 84-day periods

discount rate

The interest rate the Federal Reserve Banks charge to commercial banks for borrowing money. the com. bank gives a promissory not drawn against itself and secured by acceptable collateral- typically U.S. securities

restrictive monetary policy

This policy will increase the interest rate to reduce borrowing and spending, which will curtail the expansion of aggregate demand and hold down price-level increases

excess reserves

actual reserves - required reserves

Federal Open Market Committee (FOMC)

aids the Board of Governors in conducting monetary policy, is made up of 12 individuals. (the seven members of the BoG, the president of the New York Federal Reserve Bank, Four of the remaining presidents of Federal reserve Banks on a 1-year rotating basis)

Thrift Institutions (Savings Institutions)

are Savings and loan associations (S&Ls), mutual savings, banks, and credit unions supplement the commercial banks

required reserves

are an amount of funds equal to a specified percentage of the bank's own deposit liabilities. A bank must keep these reserves on deposit with the Federal Reserve Bank in its district or as cash in the bank's vault

Mortgage-backed securitites

are bonds backed by mortgage payments; banks first made mortgage loans and then bundled hundreds or thousands of them together and sold them off as bonds

Near Monies

are certain highly liquid financial assets that do not function directly or fully as a medium of exchange but can be readily converted into currency or checkable deposits

Financial services industry

are commercial banks, thrifts, insurance companies, mutual fund companies, pension funds, security firms, and investment banks

Commercial Banks

are the primary depository institutions. They accept the deposits of households and businesses, keep the money safe until it is demanded via checks, and in the meantime use it to make available a wide variety of loans.

Taylor rule

assumes that the Fed has a 2 percent "target rate of inflation" that it is willing to tolerate and that the FOMC follows three rules when setting its target for the Federal funds rate

reserve ratio with Fed

can be manipulated by the Fed in order to influence the ability of commercial banks to lend

open-market operations

consist of buying government bonds (U.S. securities) from or selling government bonds to commercial banks and the general public

M1 (the US money supply)

contains: 1. Currency (in the hands of the public) 2 Checkable deposits

monetary policy

deliberate changes in the money supply to influence interest rates and thus the total level of spending in the economy. The goal is to achieve and maintain price level stability, full employment, and economic growth

Store Value

enables people to transfer purchasing power from the present to the future. by keeping money in the bank, or in a variety of assets. (real estate, stocks, bonds, precious metals such as gold, and other)

time deposits

funds that become available at their maturity.

The Federal Reserve System

goal is to control the money supply

Subprime mortgage loans

high interest rate loans to home buyers with higher than average credit risk

Liquidity Trap

in which adding more liquidity to banks has little or no additional positive effect on lending, borrowing, investment, or aggregate demand

Fractional reserve banking system

in which only a portion of checkable deposits are backed up by reserves of currency in bank vaults or deposits at the central bank

Liquidity

is the ease with which assets can be converted quickly into the most widely accepted and easily spent form of money, cash, with little or no loss of purchasing power

interest

is the price paid for the use of money; the price that borrowers need to pay lenders for transferring purchasing power to the future

Moral Hazard

is the tendency for financial investors and financial services firms to take on greater risks because they assume they are at lest partially insured against losses

Medium of exchange

is usable for buying and selling foods and services; allows for non bartering; enables society to gain the advantages of geographic and human specialization

Treasury Reserve Notes

issued by the Federal Reserve System

Money market mutual fund (MMMF)

offered by a mutual fund comapny, a depositor can redeem shares by making a call, using the internet, or writing a check for $500 or more

vault cash

or till money: cashe held by a bank

Legal tender

our confindence in the acceptability of paper money is strengthened because government has designated currency as legal tender. That means that paper money is a valid and legal means of payment of any debt that was contracted in dollars.

asset demand for money

since holding money derives from money's function as a store of value, people want to hold money as an asset in many forms: corporate stocks, corporate or government bonds, or money

balance sheet

summarizes the financial position of the bank at a certain time; is a statement of assets- things owned by the bank or owed to the bank- and claims on those assets. (assets = liabilities + net worth)

The Federal Reserve focuses monetary policy on the interest rate that it can directly influence:

the Federal Funds Rate

actual reserves

the actual amount of reserves

prime interest rate

the benchmark interest rate used by banks as a reference point for a wide range of interest rates charged on loans to businesses and individuals.

Board of Governors

the central authority of the U.S. money and banking system of the Federal Reserve System

Token Money

the currency of the United States; means that the face value of any piece of currency is unrelated to its intrinsic value: the value of the physical material

transactions demand for money

the demand for money as a medium of exchange

Federal funds rate

the interest rate paid on the loans banks lend to other commercial banks

securitization

the process of slicing up and bundling groups of loans, mortgages, corporate bonds, or other financial debts into distinct new securities

total demand for money

the total amount of money the public wants to hold, both for transactions and as an asset, at each possible interest rate. Is found on a graph by horizontally adding the asset demand to the transactions demand

Wall Street Reform and Consumer Protection Act

was signed into federal law by President Barack Obama on July 21, 2010 at the Ronald Reagan Building in Washington, DC.[1] Passed as a response to the Great Recession, it brought the most significant changes to financial regulation in the United States since the regulatory reform that followed the Great Depression

Troubles Asset Relief Program (TARP)

which allocated $700 billion to the U.S. Treasury to make emergency loans to critical financial and other U.S. firms. "bailout"

12 Federal Reserve Banks

which blend private and public control, collectvely serve as the nation's "central bank".

expansionary monetary policy

will lower the interest rate to bolster borrowing and spending, which will increase aggregate demand and expand real output; initiated during faces of recession and unemployment