learning curve ch. 34
the FDIC guarantees banks how much for each depositor to avoid bank runs
$250,000
the amount of U.S currency held by people and nonbank firms is enough for every man, woman, and child in the United States to have approximately how much currency?
$5200
Fed will predict and monitor these things to see its effect on aggregate demand:
-how low short term interest rates have to go before they stimulate more investment borrowing -whether businesses that borrow will hold the money as a precaution against bad times -whether businesses that borrow will promptly buy capital and hire labor
the Federal Reserve does these things:
-regulate banks -lend money to banks -keep accounts for private banks
money multiplier
1/reserve ratio
illiquid bank
a bank whose short term liabilities are greater than its short term assets but overall whose assets are greater than its liabilities
A solvency crisis occurs when:
banks begin to have liabilities in excess of the value of their assets
a liquid asset
can be used for payments; and quickly without loss of value, be made usable for payments.
what is the most liquid asset
currency (cash)
change in money supply caused by change in reserves
is equal to the amount of the change in reserves times the money multiplier
the money multiplier
is the amount by which the money supply expands with each dollar increase in reserves
The federal open market committee determines the
monetary policy; making this the most important and influential part of the Fed system
the Federal Funds rate is the:
overnight lending rate from one major bank to another
when banks are worried that depositors might want to withdraw their cash or when loans don't seem profitable, they want a reserve ratio that is
relatively high
if the Fed buys bonds in open market operation, the AD curve will
shift right
what is one of the reasons that banks keep their accounts at the Federal Reserve?
some banks are required by law to hold accounts with the Federal Reserve
Moral hazard occurs when banks and other financial institutions
take on too much risk, hoping that the Fed and regulators will later bail them out
reserve ratio
the fraction of deposits that banks hold as reserves
the federal funds rate is determined by
the market through supply and demand for loans
if the monetary base increases,
the money supply increases, which reduces short term interest rates, which causes more borrowing and investing
fractional reserve banking
when banks hold only a fraction of their deposits in reserve and lend the rest