Economics Ch 14, 15, 16
cyclical asymmetry
"pushing on a string" economists say that monetary policy may suffer from it: monetary policy would be ineffective at pushing aggregate demand to the right
monetary multiplier
(checkable deposit multiplier): defines the relationship between any new excess reserves in the banking system and the magnified creation of new checkable-deposit money by banks as a group. The reserves and deposits lost by one bank become reserves of another bank (1 / reserve ratio)
Fed Functions
- Issuing currency - Setting reserve requirements and holding reservers - Lending to financial institutions and serving as an emergency lender of last resort - Providing for check collection - Acting as fiscal agent - Supervising banks - Controlling the money supply
Savings Account
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M2
1 Savings deposits, including money market deposit accounts 2 Small-denominated (less than $100,000) time deposits 3 Money market mutual funds held by individuals
Checkable Deposits
49% of M1; , money deposited in a bank that can be withdrawn at any time by presenting a check;
Money
A Standard Value, a medium of exchange, a store of value
What is the Fractionale Reserve System
A banking system in which only a fraction of bank deposits are backed by actual cash-on-hand and are available for withdrawal. This is done to expand the economy by freeing up capital that can be loaned out to other parties.
Money market deposit account (MMDA)
An interest-bearing account that typically pays a higher interest rate than a savings account, and which provides the account holder with limited check-writing ability.
How do banks create and destroy money
Banks create money buy lending the money of deposits in their banks. The Gov. takes money out of the money supply by selling gov. securities to banks. The Fed. also prints money
What is Money in USA?
Coins, dollars,
reserve ratio
Commercial bank required reserves / commercial bank's checkable deposit liabilities) the ratio of the required reserves the commercial bank must keep on the bank's own outstanding checkable-deposit liabilities
What is FIAT money?
Currency that a government has declared, but is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material that the money is made of. Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on faith. Fiat is the Latin word for "it shall be".
What Backs-up our money?
Nothing, today there is no physical quantity that backs p our money, the worth is in the faith of the people and the government's ability to keep the value of money relatively stable. The US used to base its currency on the Gold Standard but ended that in 1971 because it was inefficient
Unit of Account
Society uses monetary units (dollars) as a yardstick for measuring the relative worth of a wide variety of goods, services, and resources
term auction facility
The fourth tool for altering bank reserves. The Fed holds two auctions each month at which banks bid for the right to borrow reserves for 28-day and 84-day periods
discount rate
The interest rate the Federal Reserve Banks charge to commercial banks for borrowing money. the com. bank gives a promissory not drawn against itself and secured by acceptable collateral- typically U.S. securities
restrictive monetary policy
This policy will increase the interest rate to reduce borrowing and spending, which will curtail the expansion of aggregate demand and hold down price-level increases
excess reserves
actual reserves - required reserves
Federal Open Market Committee (FOMC)
aids the Board of Governors in conducting monetary policy, is made up of 12 individuals. (the seven members of the BoG, the president of the New York Federal Reserve Bank, Four of the remaining presidents of Federal reserve Banks on a 1-year rotating basis)
Thrift Institutions (Savings Institutions)
are Savings and loan associations (S&Ls), mutual savings, banks, and credit unions supplement the commercial banks
required reserves
are an amount of funds equal to a specified percentage of the bank's own deposit liabilities. A bank must keep these reserves on deposit with the Federal Reserve Bank in its district or as cash in the bank's vault
Mortgage-backed securitites
are bonds backed by mortgage payments; banks first made mortgage loans and then bundled hundreds or thousands of them together and sold them off as bonds
Near Monies
are 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
Financial services industry
are commercial banks, thrifts, insurance companies, mutual fund companies, pension funds, security firms, and investment banks
Commercial Banks
are the primary depository institutions. They accept the deposits of households and businesses, keep the money safe until it is demanded via checks, and in the meantime use it to make available a wide variety of loans.
Taylor rule
assumes that the Fed has a 2 percent "target rate of inflation" that it is willing to tolerate and that the FOMC follows three rules when setting its target for the Federal funds rate
reserve ratio with Fed
can be manipulated by the Fed in order to influence the ability of commercial banks to lend
open-market operations
consist of buying government bonds (U.S. securities) from or selling government bonds to commercial banks and the general public
M1 (the US money supply)
contains: 1. Currency (in the hands of the public) 2 Checkable deposits
monetary policy
deliberate changes in the money supply to influence interest rates and thus the total level of spending in the economy. The goal is to achieve and maintain price level stability, full employment, and economic growth
Store Value
enables people to transfer purchasing power from the present to the future. by keeping money in the bank, or in a variety of assets. (real estate, stocks, bonds, precious metals such as gold, and other)
time deposits
funds that become available at their maturity.
The Federal Reserve System
goal is to control the money supply
Subprime mortgage loans
high interest rate loans to home buyers with higher than average credit risk
Liquidity Trap
in which adding more liquidity to banks has little or no additional positive effect on lending, borrowing, investment, or aggregate demand
Fractional reserve banking system
in which only a portion of checkable deposits are backed up by reserves of currency in bank vaults or deposits at the central bank
Liquidity
is the ease with which assets can be converted quickly into the most widely accepted and easily spent form of money, cash, with little or no loss of purchasing power
interest
is the price paid for the use of money; the price that borrowers need to pay lenders for transferring purchasing power to the future
Moral Hazard
is the tendency for financial investors and financial services firms to take on greater risks because they assume they are at lest partially insured against losses
Medium of exchange
is usable for buying and selling foods and services; allows for non bartering; enables society to gain the advantages of geographic and human specialization
Treasury Reserve Notes
issued by the Federal Reserve System
Money market mutual fund (MMMF)
offered by a mutual fund comapny, a depositor can redeem shares by making a call, using the internet, or writing a check for $500 or more
vault cash
or till money: cashe held by a bank
Legal tender
our confindence in the acceptability of paper money is strengthened because government has designated currency as legal tender. That means that paper money is a valid and legal means of payment of any debt that was contracted in dollars.
asset demand for money
since holding money derives from money's function as a store of value, people want to hold money as an asset in many forms: corporate stocks, corporate or government bonds, or money
balance sheet
summarizes the financial position of the bank at a certain time; is a statement of assets- things owned by the bank or owed to the bank- and claims on those assets. (assets = liabilities + net worth)
The Federal Reserve focuses monetary policy on the interest rate that it can directly influence:
the Federal Funds Rate
actual reserves
the actual amount of reserves
prime interest rate
the benchmark interest rate used by banks as a reference point for a wide range of interest rates charged on loans to businesses and individuals.
Board of Governors
the central authority of the U.S. money and banking system of the Federal Reserve System
Token Money
the currency of the United States; means that the face value of any piece of currency is unrelated to its intrinsic value: the value of the physical material
transactions demand for money
the demand for money as a medium of exchange
Federal funds rate
the interest rate paid on the loans banks lend to other commercial banks
securitization
the process of slicing up and bundling groups of loans, mortgages, corporate bonds, or other financial debts into distinct new securities
total demand for money
the total amount of money the public wants to hold, both for transactions and as an asset, at each possible interest rate. Is found on a graph by horizontally adding the asset demand to the transactions demand
Wall Street Reform and Consumer Protection Act
was signed into federal law by President Barack Obama on July 21, 2010 at the Ronald Reagan Building in Washington, DC.[1] Passed as a response to the Great Recession, it brought the most significant changes to financial regulation in the United States since the regulatory reform that followed the Great Depression
Troubles Asset Relief Program (TARP)
which allocated $700 billion to the U.S. Treasury to make emergency loans to critical financial and other U.S. firms. "bailout"
12 Federal Reserve Banks
which blend private and public control, collectvely serve as the nation's "central bank".
expansionary monetary policy
will lower the interest rate to bolster borrowing and spending, which will increase aggregate demand and expand real output; initiated during faces of recession and unemployment