Ch. 14 Macro
when banks gain reserves
they make new loans, and the money supply expands
when banks lose reserves
they reduce their loans, and the money supply contracts
the Fed has more control over open-market operations than the discount policy
true
why might hyperinflation occur?
when governments want to spend much more than they raise through taxes, so they force their central bank to "buy" government bonds
hyperinflation
when inflation is in excess of 100% per year
if the money supply grows slower than the rate of rGDP
deflation will occur
reserves
deposits that a bank keeps as cash in its vault or on deposit with the federal reserve
to increase the money supply, the Fed
directs its trading desk to buy U.S. Treasury securities
investment banks
do not typically accept deposits from or make loans to households; provide investment advice and engage in trading and creating securities
board of governors
responsible for overseeing the federal reserve system
what effect does decreasing the required reserve ratio have
results in more loans being made, increasing the money supply
the Federal Open Market Committee conducts
America's monetary policy
m1
the sum of currency in circulation, checking account deposits in banks, and holdings of traveler's checks
open market operations
buying and selling of treasury securities by the Fed in order to control the money supply
how have firms become a "shadow banking system"
by raising funds from investors and providing them directly or indirectly to firms and households
if bankers become more uncertain regarding future deposits and withdrawals and choose to hold more excess reserves against deposits, the money multiplier will increase
false
your checking account balance is included in your bank's assets
false
an increase in the required reserve ratio results in
fewer loans being made
what makes the "shadow banking system" different from commercial banks
firms are less regulated by the government, including not being FDIC-insured, and they rely more heavily on borrowed money
hedge funds
funds that raise money from wealthy investors and make sophisticated investments
money market mutual funds
funds that sell shares to investors and use the money to buy short-term Treasury bills and commercial paper (loans to corporations)
countries with higher growth in the money supply have what rates of inflation?
higher
m2
includes m1, plus savings account balances, small-denomination time deposits, balances in money market deposit accounts, and non-institutional money market fund shares
what action does the FDIC take to limit bank panics
insures deposits in many banks, up to a limit
discount rate
interest rate paid on money banks borrow from the Fed
what effect does lowering the discount rate have
it encourages banks to borrow more money, increasing the money supply
a banking system's reserves create what for the Fed?
liabilities
required reserve ratio
minimum fraction of deposits banks are required by law to keep as reserves
securitization
process of transforming loans or other financial assets into securities
excess reserves
reserves over the legal requirement
required reserves
reserves that a bank is legally required to hold, based on its checking account deposits
to decrease the money supply, the Fed
sells its securities
if banks do not loan out all their excess reserves, then the real world multiplier is
smaller than 1/RR
monetary policy
the actions the federal reserve takes to manage the money supply and interest rates
inflation results from
the money supply growing at a faster rate than real GDP
simple deposit multiplier
the ratio of the amount of deposits created by banks to the amount of new reserves