Economics ch 25

What are the tools the Federal Reserve System uses to control the money supply?

3 tools.- Open Market operations, last resort loans and required reserve ratio.The fed influences the quantity of money and interest rates and adjusting the quantity of reserves available to the banks and the reserves the banks must hold.

What is the discount rate of interest?

The Fed is the lender of last resort which means that if a bank is short of reserves it can borrow from the Fed. But the Fed sets the interest rate on last resort loans and this interest rate is called the Discount Rate.

What is a monetary base?

The Fed's liabilities together with coins issued by the Treasury make up the monetary base. That is, the monetary base is the sum of currency and depository institution deposits at the Fed. When the Fed changes the monetary base, the quantity of money and interest rate change. The Feds liabilities are the uses of the monetary base as currency and bank reserves. The monetary base is defined as the sum of currency in circulation and reserve balances (deposits held by banks and other depository institutions in their accounts at the Federal Reserve).

Who governs the Federal Reserve System?

The board of Governors. A seven member board appointed by the President of the United States and confirmed by the senate governs the Fed.

What does reserves mean for a commercial bank

A banks reserves are notes and coins in the banks vault or in a deposit account at the Federal Reserve. These funds are used to meet depositor's currency withdrawals and to make payments to other banks

What is monetary policy and who is responsible for conducting it?

A central bank is a banks bank and a public authority that regulates nation's depository institutions and conducts monetary policy, which means that it adjust the quality of money in circulation and influences interest rates. A central bank FED is responsible for conducting it.

What does the quantity theory of money state

A special theory of the price level and inflation the quantity theory of money explains this long run adjustment of the price level. The quantity theory of money is the proposition that in the long run an increase in the quantity of money brings an equal percentage increase in the price level

What is liquidity?

Liquidity is the property of being easily convertible into a means of payment without loss in value.

What is included in M1?

M1 consists of currency and traveler's checks plus checking deposits owned by individuals and businesses

What is M2 and what is its largest component

M2 consists of M1 plus time deposits, savings deposits,money market mutual funds and other deposits. Its largest component is SAVINGS DEPOSITS!

What are the functions of money?

Money is a Medium of exchange, unit of account, store value are the 3 functions.

What does money consist of in the United States?

Money serves three other function: medium of exchange, unit of account and a store of value.

What is an open market operation?

Open market operation- the purchase or sale of securities by the Fed in the loanable funds market.

What is the Federal Reserve System

The central bank of the united states.

What is the main policy-making organ of the Federal Reserve System?

The federal open market committee is the main policy making organ in the FED

How is the majority of money created in the United States

When a bank has excess reserves, it makes loans and creates deposits. When the entire banking system has excess reserves, total loans and deposits increase and the quantity of money increases.

What is barter?

Without a medium of exchange, goods and services much be exchanged directly for other goods and services an exchange called a Barter. Barter requires a double coincidence of wants, a situation that rarely occurs.

What is the Federal Open Market Committee and who are its members?

the main policy making organ of the Fed. The FOMC consists of the following members. The chairman and the other six members of the board of governors. The president of the Fed reserve bank of New York. The presidents of the other regional Fed Reserve banks (on whom, on a yearly rotating basis, only four vote).