Section 3: Money and the Monetary System
Suppose a bank fails. What amount does the FDIC insure for each depositor?
$250,000
Advertising Statements
-Buy a new home for $1,000 down -Own a home for $750 per month
U.S. Mint
-Produces coin currency -Produces medals -Sells and stores platinum, gold, and silver coins
Which of these statements best describes the FHLB (The Federal Home Loan Bank System)?
A lender's lender
The FDIC serves a very important role. What led to its creation?
Bank failures during the Great Depression
Which event led to the establishment of the FDIC?
Bank failures during the Great Depression
Which agency is responsible for the production of paper currency?
Bureau of Engraving and Printing
OCC (Office of the Comptroller of the Currency)
Charters and supervises banks
If the Fed ________ the discount window, it's making less money available to banks. If banks have less money available, they can make fewer real estate loans.
Closes
BEP (Bureau of Engraving and Printing)
Designs paper currency
Payout
FDIC pays insured deposits to consumers
Which of the following is classified as the least liquid on the scale?
Institutional money market funds
Which of these activities do FHLBanks perform?
Lend money to member banks.
Treasury bills
Maturities of up to one year
Purchase and assumption
Open bank takes over all deposits of the failed bank
If the Fed ________ the discount window, it's making more money available to banks. When banks have more money available, they can make more real estate loans.
Opens
Inspector General
Performs audits and investigations
U.S. Mint
Produces coins
CDFI (Community Development Financial Institution)
Provides credit to distressed communities
The Fed (Federal Reserve)
Provides educational data and reports activities related to monetary policy
U.S. Treasury
Provides information related to currency and government securities
Long- and short-term debt instruments are called ______.
Securities
Which of the following would the FDIC most likely not insure?
Stock certificates
Unit of account, medium of exchange, and what other factor define money?
Store of value
What is the purpose of the Federal Reserve System?
The Fed regulates the U.S. depository institutions.
What agency receives paper currency prior to its distribution but after it's printed?
The Federal Reserve
What is the most likely effect when the Fed sells securities on the open market?
The economy may slow down due to a decreased money supply.
Which of the following describes the discount rate?
The rate at which a bank can obtain a loan from its Federal Reserve bank when using commercial paper as collateral
A short-term security issued by the Treasury that has a maturity term of one year or less is called a _______.
Treasury bill
Which of the following statements is true about the Federal Reserve?
Twelve district banks comprise the Fed.
Treasury notes
Two- to 10-year maturity
Which agency is responsible for the production of coins?
U.S. Mint
Store of value, medium of exchange, and what other factor define money?
Unit of value
Buying and Selling Treasuries
When the Treasury encounters a deficit between funds and bills, it may sell securities to generate more income. This removes money from the economy, as it's now in the Treasury's accounts. Less money in the economy means less money in the market for lending and purchasing. This could cause the real estate market to slow down.
In what situation would the U.S. Treasury be most willing to sell securities?
When the government's bills exceed income collected
Francis did his homework, decided on a loan, and filled out and submitted his loan application. Now, he's having second thoughts. How long does his right to rescind last? select the two best answers.
-3 days from loan application -3 days from disclosure statement
Member Banks
-A nationally chartered bank must be a Federal Reserve member bank. -A state bank is not required to become a member bank. -Member banks must purchase stock in their district bank. -Member banks can borrow money from their district bank.
Benefits of Membership:
-Access to Federal Reserve financial and information services -Borrow money from the district bank, when needed -Stability of performing activities under the Federal Reserve's protection
FOMC or Federal Open Market Committee
-All members of the Board of Governors serve on the FOMC. -There is no Federal Reserve Bank of Washington, DC. However, the Reserve Bank of New York always serves as a member of the FOMC. -The Federal Reserve district banks rotate participation in the FOMC. -The members are the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four other reserve bank presidents (who rotate participation). -The FOMC manages the country's money supply.
Imagine a bank has failed and the payout insolvency method was used. The FDIC will pay out the insured deposits to consumers. How does the FDIC obtain funding to make these payments?
-Earnings from U.S. Treasury securities -Premiums from banks and thrifts
TILA Violations
-Fine up to $5,000 -Imprisonment up to 12 months
The Federal Deposit Insurance Corporation (FDIC)
-Five-person board of directors -Members are appointed by the president and confirmed by the Senate -No more than three members can be from the same political party -Funding is received from bank and thrift premiums and U.S. Treasury security earnings -The FDIC insures deposits up to $250,000 per depositor, per bank or thrift institution, and inspects operations and soundness of banks -Insured = Deposit accounts, including: checking accounts, savings accounts, money market, certificates of deposit (CD) -Not insured = Mutual funds, securities, stocks, bonds, insurance, and annuity products are not insured by the FDIC
We know what led to the FDIC's creation, but what does it do?
-Insures deposits made at banks and thrift institutions -Inspects bank operations -Analyzes soundness of banks
Loan Disclosures
-Lender name -Finance charges -Total amount financed -Number of payments due, due date, and payment amount -Late or pre-payment penalties
The Fed's Response to the 2007 Financial Crisis
-Lowered the federal funds rate -Expanded open market operations -Decreased rates -Purchased securities through its open market operations
Treasury Functions
-Manages federal finances, government accounts, and public debt -Produces currency and coins, and issues government securities -Collects duties, monies, and taxes owed to the U.S. and pays what is owed by the U.S. -Supervises national banks and financial institutions -Enforces finance and tax laws -Investigates counterfeiters, forgers, and tax evaders
Do you know how many pigs it takes to buy a parcel of land? A whole pig? Two hooves and a snout? You can see where bartering can be challenging (and a bit gruesome). Today, we have different items of value that represent money. Keep the pigs in their pen, and instead identify which of these items can be used to purchase that parcel of land. Select all that apply.
-Paper currency -Coins -Credit cards -Checks -Gift cards -Traveler's checks
Let's go way back in time. Imagine you see a piece of land that would be great for raising chickens. Which of these items might you use to purchase this land?
-Pigs -Breads -Crops -Metals
Bureau of Engraving and Printing
-Produces paper currency -Produces U.S. passports -Produces immigration and naturalization certificates
What does the U.S. Treasury do?
-Promotes sustainable economic growth and stability -Ensures the country's financial security -Advises the president on economic and financial issues -Improves financial institution governance
Member Bank Requirements:
-Purchase stock in their district reserve bank equivalent to a specific percentage of their capital (in order to maintain sufficient reserves) -Obey Federal Reserve rules and regulations
Troubled Asset Relief Program (TARP) Goals
-Stabilize the financial system -Boost credit markets -Help families avoid foreclosure
While bartering may have worked in the past, there were challenges with using items like pigs and crops. Money came to be defined by three factors. What are they?
-Store of value -Unit of account -Medium of exchange
The Fed's (Federal Reserve System) Purpose
-Supervises bank activities -Facilitates the selling and discounting of commercial paper -Influences the supply and cost of money -Regulates depository institutions
FHLB Organization
-The FHLB system is comprised of 11 FHLBanks that serve the U.S. -FHLBanks are privately owned cooperatives. -FHLBanks are regulated by the Federal Housing Finance Authority.
All areas of the country, as well as U.S. commonwealths and territories, are represented by a Federal Reserve district. How many districts make up the system?
12
The Federal Reserve is made up of
12 districts that serve all states, as well as U.S. commonwealths and territories. Each district is represented by a bank city that serves as that district's head office. These banks interact directly with member banks and the U.S. Treasury.
There are ____ branch cities located across the country that support the activities of the district banks.
24
Treasury bonds
30-year maturity
Another component of the Federal Reserve organization is the Board of Governors. Each member is appointed by the president and confirmed by the Senate to serve a 14-year term. How many people make up the Board of Governors?
7
Which of the following describes a Treasury note?
A Treasury security with a maturity term between two and 10 years
FinCEN (Financial Crimes Enforcement Network)
Assists financial crime investigations
Adobe State Bank is a Federal Reserve member bank. It needs to obtain a loan from its reserve district bank and has put up some commercial paper as collateral. When it obtains this loan, which rate applies?
Discount Rate
Which government entity oversees open market operations?
Federal Open Market Committee
Barney Regional Bank is a nationally chartered bank and a member bank of the Federal Reserve. Barney is obtaining an overnight loan from another member bank but isn't putting up any collateral. Which rate applies?
Federal funds rate
Trading items on open market operations is one of several ways the Fed influences the money supply and the economy. What item is bought and sold?
Government securities
FDIC (Federal Deposit Insurance Corporation)
Helps consumers become more savvy about using money
The ease with which an asset is converted to cash is called ______.
Liquidity
The measures for money are tied to a specific concept. What is it?
Liquidity
Francis is doing his homework and comparing loan options. Here are a couple of loans he came across. Which is more affordable?
Loan A term: one year; principal: $5,000; interest rate: 8%; other fees: $0
Annual percentage rate is a standardized rate that accounts for all of the costs of obtaining a loan. Let's help Francis narrow down a couple more loan options. Which of these two is more affordable?
Loan D term: one year; principal: $5,000; interest rate: 7%; other fees: $50; APR: 8%
Store of value, unit of account, and what other factor define money?
Medium of exchange
If the Fed increases reserve requirements, banks keep...
More funds on deposit at their district bank. This means banks have fewer funds available to lend, including mortgages.
The Federal Reserve is...
Organized into districts, with Federal Reserve branch cities and member banks located across the country.
Wendy has been approved for her first mortgage. The lender advertised a 4.6% interest rate. She's nervous about the terms and fees. What information is the lender required to provide?
Payment schedule, APR, finance charges, pre-payment penalties, late penalties, and total financed amount
After weeks of research, test drives, and haggling, Wendell is finally buying a new car. His prudent money habits in the past have earned him a credit score well into the 800s. In fact, his score is the highest his lender has ever seen and has given him access to interest rates available only to the most creditworthy consumers. What rate are we talking about?
Prime Rate
FHFA (Federal Housing Finance Agency)
Publishes the home price index and reports related to housing
The two most common methods used when a bank fails are the payout method and the ______ method.
Purchase and assumption
Prime Rate
Rate charged by banks to the most creditworthy consumers
Discount Rate
Rate charged by the Fed to a member bank when borrowing money with commercial paper as collateral
Federal Funds Rate
Rate charged on overnight loans between member banks
FHLB (Federal Home Loan Bank System)
Reports on the liquidity and financial strength of banks throughout its 11 districts
What is one of the ways the U.S. Treasury promotes economic growth and stability?
Supervises national banks and financial institutions.
When securities are bought:
The FOMC buys securities in exchange for money. This means there is now more money available in the economy and more money for lending and purchases. This encourages economic growth.
When securities are sold
The FOMC sells these securities in exchange for money. This means there is now less money available in the economy. Less money in the economy means less money available for lending and purchases, which slows the economy down.
Which of the following describes the prime rate?
The rate at which a bank or lender may loan money to its most creditworthy borrowers
Which statement most accurately describes the right of rescission?
The three-business-day period from the date of loan application or disclosure, during which the borrower can cancel the loan
Francis is looking to obtain a loan to make some improvements to his home. Little does he know, but the Truth in Lending Act affects this experience. What is the purpose of TILA?
To better educate consumers about the cost of credit and financing
While the Fed can increase or decrease reserve requirements to influence the money supply and economy, these requirements serve another purpose. What is it?
To ensure that banks will have funds available when they're needed