Macro Chapter 12 Study Guide

leakage

A _________ is money that leaves the money creation process because of an action taken by a bank, an individual, or a business.

solvency crisis

A bank faces a _______ __________ if its liabilities exceed its assets. Banks are exposed to the risk of becoming insolvent when borrowers default on loans. The loan is lost as an asset, but the liabilities to depositors remain. Consequently, banks may hold excess reserves during tough economic times to increase their ability to absorb a higher rate of defaults.

Leakages

A reduction in the amount of money that is used for lending that reduces the money multiplier. It is caused by banks choosing to hold excess reserves and from individuals and businesses choosing to hold more cash.

Solvency Crisis

A situation when a bank's liabilities exceed its assets.

Federal Open Market Committee (FOMC)

A twelve-member committee that is composed of members of the Board of Governors of the Fed and selected presidents of the regional Federal Reserve Banks. it oversees open market operations (the buying and selling of government securities), the main tool of monetary policy.

excess reserves

Banks create money by loaning out their ________ __________. An initial deposit of cash can be turned into loans and deposits many times over.

Fractional Reserve Banking System

Describes a banking system in which a portion of bank deposits are held as vault cash or in an account with the regional Federal Reserve Bank, while the rest of the deposits are loaned out to generate the money creation process.

Money Multiplier

Measures the potential or maximum amount the money supply can increase (or decrease) when new deposits enter (exit) the system and is defined as 1 divided by the reserve requirement. The actual money multiplier will be less, because some banks hold excess reserves.

Information, Recognition, Decision, Implementation

Monetary policy is subject to four major time lags: _________ lag _________ lag _________ lag _________ lag

Excess Reserves

Reserves held by banks above the legally required amount.

federal funds rate

Targeting the _______ ________ ________ through open market operations gives the Fed an ability to influence the price level and output in the economy.

12 Regional Banks

The Federal Reserve System is structured around ___ _______ _________ and the Board of Governors.

Lender of Last Resort

The Federal Reserve serves as the _______ __ _________ __________, stepping in to loan money to banks facing emergency cash shortages.

Reserve Requirements, Discount Rates, Open Market Operations

The Federal Reserve uses three primary tools in the conduct of monetary policy: 1. ______ _______ 2. _______ __________ 3. __________ ____________ _________ These tools are used to increase or decrease the money supply.

fractional reserve system

The _______ _________ ________ permits banks to create money through their ability to accept deposits and make loans.

leakage adjusted money multiplier

The _______ __________ _________ ________ takes into account the required reserve requirement along with excess reserves held by banks and cash held by individuals and businesses.

Federal Reserve

The ________ __________ is composed of: The Board of Governors, located in Washington, D.C. Twelve regional Federal Reserve Banks in major cities around the nation

FOMC

The ____________ consists of: Seven members of the Board of Governors Five of the 12 regional Federal Reserve Bank presidents The ____________ oversees open market operations, the main tool of monetary policy.

liability

The bank also acquires a ________ in the form of a checking account balance that must be honored on demand.

Open Market Operations

The buying and selling of U.S. government securities, such as Treasury bills and bonds, to adjust reserves in the banking system.

Federal Reserve System

The central bank of the United States.

Federal Funds Rate

The interest rate financial institutions charge each other for overnight loans used as reserves.

Discount Rate

The interest rate of the Federal Reserve charges commercial banks and other depository institutions to borrow reserves from a regional Federal Reserve Bank.

Reserve Ratio

The percentage of a bank's total deposits that are held in reserves, either as cash in the vault or as deposits at the local Federal Reserve Bank.

Reserve Requirement

The required ratio of duns that commercial banks and other depository institutions must hold in reserve against deposits.

actual money multiplier

The role that the U.S. dollar plays as the world's most popular reserve currency causes the majority of dollars to be held outside of U.S. borders. This has the effect of reducing the _______ ________ __________ relative to its potential.

Money Multiplier = 1 / Reserve Requirement

What is the Money Multiplier formula?

actual money multiplier

When banks choose not to loan all of their excess reserves, the _______ _______ __________ is reduced. The reduction in loans recirculates less money back through the banking system.

leakage, reduced

When individuals or businesses choose to keep money in cash rather than in bank deposits, there is a ________ in the money supply. That money is not available to be loaned to someone else. The actual money multiplier is _________.

money supply

When the government expands the _______ __________, it does so by adding reserves electronically to banks in exchange for bonds and other assets. Banks will then make loans against these excess reserves. The expansion process is compounded by the money multiplier.

Asset

When you deposit cash in your checking account, the bank acquires an ______ in the form of cash.