Chapter 14 Money, Banking, and Financial Institutions

Paper money and coins are considered ______ and are one major component of M1; the other major component is _____.

currency; checkable deposits

Securitization is the process of dividing and grouping bundles of loans, mortgages, corporate bonds, or other financial ______ so it becomes new security that is bought and sold. In the case of mortgage-backed securities, they were designed to ______ the financial return and ______ risk to the buyer. Insurance could be bought on these securities in the form of collateralized default ______. When the housing market declined in 2007 and 2008, the securities fell in value, and insurers had to make to payment to them, thus exposing many investors and financial firms to large ______.

debt; increase; decrease; swaps; losses

Runaway inflation may significantly ________ the purchasing power of money and _______ its acceptance as a medium of exchange.

decrease; decrease

The financial crisis of 2007 and 2008 largely started with a major wave of defaults on __________, many of which were _______. Many banks and financial institutions took losses on these securities that were backed by _______, thus weakening the health of these institutions and reducing the availability of money and credit in the economy.

home mortgage loans; subprime; home mortgages

The Congress established the Fed as a(n) _________ agency of government. The objective was to protect it from political pressure so it could control _______.

independent; inflation

The purchasing power of money varies _______ with the price level. To find the value of $1 __________ 1 by the price level.

inversely, divide

The ease with which an asset can be converted into money such as cash with little or no loss in purchasing power is its ________. Assets that can be converted into cash more easily than other assets are ______ liquid assets.

liquidity; more

The U.S. banking system is composed of about 6,000 commercial banks, and three-fourths of which are ______ banks and about one-fourth are ______ banks. The system also includes 8,500 thrift institutions, most of which are _____ banks.

state; national; credit unions

Government's responsibility is stabilizing the purchasing power of money calls for effective control over the ___________ and the application by the president and Congress of appropriate ______ policies.

supply of money; fiscal

All coins in circulation in the United States are _____ money, which means that their intrinsic value is _____ than the face value of the coin.

token; less

Paper money is the circulating debt of the _____________ in the United States, currency and checkable deposits _________ backed by gold and silver.

Federal Reserve Bank; are not

When money is usable for buying and selling goods and services, it functions as ___________, but when money serves as a measure of relative worth, it functions as _________, and when money serves as a liquid asset, it functions as ______.

a medium of exchange; a unit of account; a store of value

The seven major functions of the Fed are (a) _______________ (b) _______________ (c) ________________ (d) ________________ (f) _________________ (g) ________________ Of these, the most important function is controlling the ___________.

a. Issuing Currency b. Setting Reserve Requirements and Holding Reserves c. Lending Money to Banks and Thrifts d. Collecting and Processing Checks e. Serving as Fiscal Agent for the Federal Government f. Bank Supervision g. Controlling the Money Supply money supply

Money has value because it is ________ in exchange for products and resources, because it is a _________ tender, and because it is relatively ______.

acceptable; legal; scarce

Credit cards _____ considered money but rather a form of _____ from the institution that issued the card.

are not; loan

The Federal Reserve System is composed of the Board of Governors and the 12 Federal Reserve _______. The policies of the Federal Reserve are often carried out by the ____________.

banks; Federal Open Market Committee

In response to the crisis, the U.S. Treasury was authorized to make emergency loans to major financial firms considered too ____ to fail under the Troubled Asset Relief Program, but these bailouts created a ________ problem because they wound up helping these firms that took on more risk than they would have without the expected government backing. The Federal Reserve also tried to improve the flow of money and credit in the financial system by serving as the _____ of last resort and establishing various programs for this purpose.

big; moral hazard; lender

The Federal Reserve Banks are ______ bands, serve as ________ banks, and are central banks whose policies are coordinated by the Board of Governors.

private; bankers'

M2 is equal to M1 plus _____ deposits that include money market ____, plus _______ and _______.

savings; deposit accounts; small-denominated, mutual funds

The Federal Open Market Committee meets regularly to buy and sell government _______ to control the nation's money supply and influence _______.

securities; interest rates