ECON 210 // CH 14-16

money market mutual fund

mutual funds that invest in short-term securities depositers can wirte checks in minimum amounts or more against their accounts

federal reserve notes

paper money issued by the federal reserve banks

forward commitment

a policy statement by a central bank indicating that it will continue to pursue a monetary policy action until a certain date is reached or until some particular threshold has been reached (for instance, the unemployment rate falling below, say, seven percent)

thrift instiutions

a savings and loan associations, mutual sacings bank, or credit union

liquidity trap

a situation in a severe recession in which the central bank's injection of additional reserves into the banking system has little or no additional positive impact on lending, borrowing, investment, or aggregate demand

unit of account

a standard unit in which prices can be stated and the value of goods and services can be compared one of the three functions of money

balance sheet

a statement of the assets, liabilites, and net worth of a firm or individual at some given time

fractional reserve banking system

a system in which commercial banks and thrift instiutions hold less than 100 percent of their checkable-deposit liabilities as reserces of currency held in bank vaults or as deposits at the central bank

store of value

an asset set aside for future use one of the three functions of money

time deposits

an interest-earning deposit in a commerical bank or thrift institution that the de[psitpr can withdraw without penalty after the end of a specified period

quantitative easing (QE)

an open-marken operation in which bonds are purchased by a centeral bank in order to increase the quantity of excess rereves held by commerical banks and therby (hopefull) stimulate the economy by increasing the amont of lending undertaken by commercial banks undertaken when interest rates are nerat zero and, consquently, it is not possible for the central bank to further stimulate the economy with lower interest rates due to the zero lower bound problem

checkable deposits

any deposit in a commerical bank or thrift instutution agains which a checn may be wirtten

legal tender

any form of currency that by law much be accepted by creditors (lenders) for the settlement of financial debts a nation's currency is this within its own borders

medium of exchange

any item sellers generally accept and buyers generally use to pay for a good or service money a convenient means of exchanging goods and services without engaging in barter

federal reserve banks

the 12 banks charted by the U.S. government that collectively act as the central bank of the United States they set monetary policy and regulate the private banking system under the direction of the board of governors and the federal open market committee each of the 12 is a qausi-public bank and acts as a banker's bank in its designated geographic region

federal open market committee (FOMC)

the 12-member gorup within the federal reserve system that decides U.S. monetary policy and how it is ececuted through open-market operations (in which the fed biys and sells U.S. government securities to adust the money supply)

federal reserve system

the U.S. central banks, consisting of the board of governors of the federal reserve and the 12 federal reserve banks, which controls the lending activity of the nation's banks and thrifts and thus the money supply commonly referred to as the "Fed"

excess reserces

the amount by which a commercial bank's or thrift institution's actual reserves exceed its required reserves actual reserves minus required reserves

asset demand for money

the amount of money people want to hold as a store of value this amount varies inversely with the interest rate

transactions demand for money

the amount of money people want to hold for use as a medium of exchange (to make payments) varies directly with nominal GDP

prime interest rate

the benchmark interest rate that banks use as a reference point for a wide range of loans to businesses and individuals

financial services industry

the broad category of firms that provide financial products and services to help households and businesses earn interest, receive dividents, obtain capital gains, insure against losses, and plan for tetirement includes commerical bamks, thrigt instiutions, inusrance companies, mutual fund companies, pension funds, investment banks, and securities firms

zero lower bound problem

the constraint placed on the ability of a central bank to stimulate the economy through lower interest rates by the fact that nominal interest rates cannot be driven lower than zero (because if interest rates were negative, people would be unwilling to put their money into banks due to the fact that deposit balances would decrease over time due to the negative interest rate)

valut cash

the currency a bank has on hand in its vault and cash drawers

liquidity

the degree to which an asset can be converted quickly into cash with little or no loss of purchasing power

reserve ratio

the fraction of checkable deposits that each commercial bank or thrift institution must hold as reserves at its local federal reserve bank or in its own bank vault also called the reserve requirement

subprime mortgage loans

high-interest-rate loans to home buyers with above-average credit risk

money market deposit (MMDA)

interest-bearing accounts offered by commercial banks and thrift institutions that invest deposited funds into a variety of short-term securities depositors may write checks agints their balance, but there are minium-balance requirments as wellas limits on the frequwncy of check wiriting and withdrawals

required reserves

the funds that each commercial and thrift institution must deposit with its local federal reserve bank (or hold as vault cash) to meet the legal reserve requirement a fixed percentage of each bank's or thrift;s checkable deposit

cyclical asymmetry

the idea that monetary policy may be more successful in slowing expansions and contolling inflation than in extracting the economy from severe recession

federal funds rate

the interest rate that U.S. banks and other depository institutions charge one another on overnight loans made out of their excess reserves

discount rate

the interest rate that the federal reserve banks charge on the loans they make to commerical banks and thrift institutions

wall street reform and consumer protection act

the law that gave authority to the federal reserve system to regulate all large financial institutions, created an oversight council to look for growing risk to the financial system, established a process for the federal government to sell off the assets of large failing financial institutions, provided federal regulatory oversight of asset-backed securities, and created a financial consumer protection bureau within the Fed

M1

the most narrowly defined money supply, equa to currency in the hands of the public and the ceckable deposits of commerical banks and thrift instutions

monetary multiplier

the multiple of its excess reserves by wich the banking system can expand checkable deposits and thus the money supply by making new loans (or buying securiteises) equal to 1 divided by the reserve requirmet

interest on reserves

the payment by a central bank of interest on the deposits held by commercial banks at the central bank required reserves+ecescess reserves, if any

interest

the payment made for the use of (borrowed) money

moral hazard

the possibility that individuals or institutions will change their behavior as the result of a contract or agreement ex. a bank whose deopsits are insured against losses may make riskier loans and investments

securitization

the process of aggreagting many indiviudal financial debts, such as mortagagres or student loans, into a pool and then issuing new securites (typically nonds) backed by the pool the holders of the new securites are entitiled to receice the debt payments made on the individual fiancvial debts in the pool

open-market operations

the purchases and sales of U.S. government securities that the federal reserve system undertakes in order to influence interest rates and the money supply one method by which the federal reserve implement monetary policy

board of governers

the seven-member group that supervises and controls the money and banking system of the United States part of the federal reserve system the federal reserve board

total demand for money

the sum of the transactions demand for money and the asset demand for money

M2

a more broadly defined money supply, equal to M1 plus noncheckable savings accounts (including money market deposit accounts), small time deposits (deposits of less than $100,000), and individual money market mutual fund balances

Taylor rule

a monetary rule proposed by economist John Taylor that would stipulate exactly how much the Federal Reserve System should change real interest rates in response to divergences of real GDP from potential GDP and divergences of actual rates of inflations from a target rate of inflation

troubled asset relief program (TARP)

a 2008 federal government program that authorized teh U.S. Treasury to loan up to $700 billion to critical financial institutions and other U.S. firms that were in exterme financial trouble and therefore at high risk of failure

monetary policy

a central banks' changing of the money supply to influence interest rates and assist the economy in achieving price-level stability, full employment, and economic growth

savings account

a deposit in a commercial bank or thrift institution on which interest payments are received generally used for saving rather than daily transactions a component of the M2 money supply

commercial banks

a firm that engages in the business of banking (accepts deposits, offers checking accounts, and makes loans)

zero interest rate policy (ZIRP)

a monetary policy in which a centeral bank sets nominal interest tates at or near zero percent per year in order to stimulate the economy

token money

bills or coins for which the amount printed on the currency bears no relationship to the value of the paper or metal embodied within it for currency still circulation, money for which the face value exceeds the commodity value

mortgage-backed securities

bonds that represent claims to all or part of the monthly mortgage payments from the pools of mortgage loans made by leaders to borrowers to help them purchase residential property

near-monies

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

actual reserves

execess reserves + required resrves = actual reserves

expansionary monetary policy

federal reserve system actions to increase the money supply, lower interest rates, and expands real GDP an easy money policy

restrictive monetary policy

federal reserve system actions to reduce the money supply, increase interest rates, and reduce unflation a tight money policy