Chapter 14: Money, Banking, and Financial Institutions

The United States' Federal Reserve system consists of how many regional banks?

12

Who implements the policy decisions related to the monetary control of the US money and banking systems?

12 Federal Reserve Banks

Terms for members of the BoG are ___ years and staggered so that one member is replaced every ___ years

14; 2

The chairperson and vice-chairperson of the BoG serve ___ year terms

4

The US president, with the confirmation of the Senate, appoints how many members of the BoG?

7

How many of the federal reserve banks implement the basic policy decisions of the BoG?

All 12 banks

How did mortgage-backed securities contribute to the financial crisis of 2007 and 2008?

Banks lost money from loans to investment firms who bought mortgage-backed securities Banks lost money on mortgages they still held

The central authority of the US money and banking system is the ___

Board of Governors of the Federal Reserve System

Without TARP, it was believed that the following would occur.

Credit would be frozen; there would be large personal losses for stockholders and executives; several financial institutions would go bankrupt with more bankruptcies in the long run

What is not considered to be money?

Currency (Credit cards) Saving deposits

What are components of M1?

Currency and checking deposits

Which of the following contributed to high default rates on mortgages?

Declining real estate values

T/F: Money supply M1 includes all components of M2

False: Money supply M1 includes all components of M2

What factors contributed to the high number of mortgage defaults?

Fed gov't encouraged banks to increase home loans and ownership Home buyers borrowed more money than they could afford Banks thought they were protected from defaults with mortgage-backed securities Banks loosened strict standard for loans

The ___ meets 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

Federal Open Market Committee (FOMC)

In the US, the monetary authorities are members of the Board of Governors of the ___ ___ System.

Federal Reserve System

What are some functions of commercial bank loans?

Finance consumer purchases of durable goods and provide short-term financial capital to businesses

The gov't monetary authorities attempt to provide the amount of money needed for the particular volume of business activity that will promote what?

Full employment, price-level stability, economic growth

What assets other than money hold wealth?

Gold, real estate, stocks

The crisis in the US financial system in 2007 and 2008 was the worst since the ___ ___ of the 1930s.

Great Depression

What was the main goal of the Troubled Asset Relief Program (TARP) that was passed by Congress in 2008?

Help prevent some firms from going bankrupt

What results in the depreciation of a country's currency and may cause more stable currencies, such as the US dollar or the European euro, to come into widespread use?

Hyperinflation

Political pressure on Congress and the executive branch may result in tax cuts and special-interest spending, which are what type of fiscal policies?

Inflationary fiscal policies

What two factors are necessary for price level stability?

Intelligent management of the money supply; careful management of interest rates

What happens when money rapidly loses its purchasing power?

It loses its role as money

A second and broader definition of money includes what?

M1 plus several near-monies

Which of the following are components of money supply?

M1, M2

What is the most liquid asset?

Money

What are subprime mortgage loans?

Mortgage loans made to high risk individuals

What is it called when banks bundle hundreds or thousands of mortgages and sell them as bonds?

Mortgage-backed securities

What is meant by the term "thrifts"?

Mutual saving banks, credit unions, savings and loan associations

What comprises the currency of the US?

Paper money and metal coins

The US ___ selects the chairperson and vice-chairperson of the Board of Governors from among the members

President

What two factors were deemed by Congress in the early 20th century to be essential for an efficient banking system?

Public control and centralization

Why did banks believe that mortgage-backed securities protected them from defaults?

Risk of default was transferred to the owner of the mortgage-backed securities

What plays a critical role in maintaining the purchasing power of the dollar?

The Federal Reserve plays a critical role in the purchasing power of the dollar

What are benefits of the government's decision to not back currency?

The ability to provide as much or as little money as needed to best suit the economic needs of the country and maintain the value of money

Metal coins are issued by the US ___

Treasury

T/F: Federally chartered banks are required to purchase shares of stock in the Fed Reserve Bank in their district.

True: Federally chartered banks are required to purchase shares of stock in the Fed Reserve Bank in their district.

Currency held by commercials banks and thrifts is excluded from the money supply M1, so as to ___

avoid counting money that is not available to the private sector; avoid double counting

The 12 Fed Reserve Banks (collectively known as the Central Bank) also serve as ___ banks

bankers'

The Fed Reserve Bank supervises the operations of ___

banks

Because money is a medium of exchange, society avoids ___.

barter

The debts or liabilities of commercial banks and thrift institutions are known as ___ deposits

checkable deposits

What financial institution accepts deposits and lends to "members", who are usually a group of people working for the same company?

credit unions

Rapid declines in the value of a ___ may cause it to cease being used as a medium of exchange

currency

When the consumer price index, or "cost-of-living" index rises, the purchasing power of the dollar goes (up/down)

down

The US gov't responded to the financial crisis with unprecedented ___ policy actions

fiscal policy

Money enables society to gain which of the following advantages?

human and geographic specialization

Studies show that countries that have independent central banks like the Fed have lower rates of ___, on average, than countries that have little or no central bank independence

inflation

The purpose of open-market operations is to control the nation's money supply and influence ___ rates

interest rates

What characterizes a money market deposit account (MMDA)?

interest-bearing short-term securities

Paper currency and checkable deposits have no ___ value

intrinsic value

In emergency circumstances the Fed Reserve Banks become the "___ of last resort to the banking system and can lend out as much as needed to ensure their banks and thrifts can meet their cash obligations

lender

An asset's ___ is the ease with which it can be converted quickly into the most widely accepted and easily spent form of money, cash, with little or no loss of purchasing power

liquidity

What are the functions of money?

medium of exchange, unit of account, store of value

Society uses ___ units as a yardstick for measuring the relative worth of goods, services, and resources

monetary

TARP created a ___ by protecting firms from losses and encouraging them to take greater risks

moral hazard

General acceptance of paper currency is (more important/equally as important) than the government's decree that money is legal tender

more important

The BoG (with the aid of the Federal ___ ___ Committee) make the basic policy decisions that provide monetary control of the US money and banking system

open market

The Fed Reserve Bank in NYC conducts most of the Fed Reserve Bank's ___-market operations

open-market

Cash is perfectly accessible or perfectly ___

perfectly liquid

Each Federal Reserve Bank is owned by what group in its district?

private commercial banks

The 12 Federal Reserve Banks are quasi-public banks, which blend ___ ownership and public control.

private ownership

Federal Reserve Banks are not motivated by ___ like private firms

profit

The Fed Reserve Banks do not deal with the ___ but rather they interact with commercial banks and thrifts

public

The ___ power of money is the amount of goods and services a unit of money will buy

purchasing

The Federal Reserve Bank sets ___ which are the fractions of checking account balances that banks must maintain as currency reserves.

reserve requirements

Money serves as a store of ___ that enables people to transfer purchasing power from the present to the future

store of value

Money derives its value from its scarcity relative to its

utility