economics chapter 13
can be used to extend new loans and make new investments.
excess reserves
a decrease in the discount rate will increase borrowing from the fed and thereby exert a _
expansionary impact on the supply of money
Reduce the interest paid on excess reserves because this will induce banks to hold less reserves and extend more loans, which will expand the money supply.
expansionary monetary policy- interest paid on excess bank reserves
When the supply of money grows rapidly relative to goods and services, its purchasing power will
fall
If the purchasing power of money is to remain stable over time, its supply must be
limited
Because of the increased holdings of excess reserves, the
money supply increased far less rapidly than the monetary base.
Because of the recession and sluggish growth, the demand for loans was
weak
At least one-half and perhaps as much as two-thirds of U.S. currency is held abroad. These dollars are includedin the M1 money supply even though they are not circulating in the U.S..
widespread use of the dollar abroad
Why Didn't the Banks Usethe Excess Reserves to Extend Loans?
There was considerable uncertainty about the future and therefore banks were reluctant to make long-term commitments.
the _ held by the fed are part of the national debt
US treasury bonds
Rapid growth was indicative of
expansionary monetary policy
if the fed wants to reduce the money supply, it will increase the interest rate paid banks on excess reserves. this will provide banks with an _
incentive to hold more reserves, which will reduce the money supply
The M1 money supply
is composed of assets that reflect the medium of exchange function of money.
Credit card balances are a
liability
if the fed wants banks to extend more loans and thereby expand the money supply, it will _
set the interest rate it pays on excess reserves very low, possibly even zero
The money multiplier will be
smaller if either banks hold on to excess reserves or private citizens hold on to cash.
like the discount rate loans, there new types of loans inject additional reserves into the banking system and thereby _
exert an expansionary impact on the money supply
when the fed lowers the required reserve ratio, it creates additional excess reserves, encouraging banks to extend additional loans which _
expands the money supply
Reduce reserve requirements because this will create additional excess reserves and induce banks to extend more loans, which will expand the money supply.
expansionary monetary policy
Extend more loans because this will increase bank reserves, encouraging banks to make more loans and expand the money supply.
expansionary monetary policy- extension of loans
Purchase additional U.S. Securities and other assets, which will increase the money supply and also expand the reserves available to banks.
expansionary monetary policy- open market operations
control of loan volume to banks and other financial institutions
extension of loans
the discount rate is closely related to the interest ration the federal funds market, a private loanable funds market where banks with excess reserves extend short term loans to other banks trying to meet their reserve requirements. the interest rate in this market is called the _
federal funds rate
The seven members of the Board of Governors also serve on the
federal open market committee
the _ created in 1913, is the central bank for the United States.
federal reserve
announcements after the regular meetings of the federal open market committee ofter focus on the _
feds target for the fed funds interest rate
Recent _ have changed the nature of money and reduced the reliability of money growth figures as an indicator of monetary policy.
financial innovations and structural changes
The _ places a ceiling on potential money creation from new reserves.
fractional reserve requirement
Banks are required to maintain only a fraction of their assets as reserves against their customers' deposits (required reserves).
fractional reserve system
the U.S. banking system is a
fractional reserve system
In the past, economists have often used the growth rate of the money supply to
gauge the direction of monetary policy.
the fed controls the federal funds rate through open market operations - the fed can reduce the feds funds rate by buying bonds, which will _ - the fed can increase the fed funds rate by selling bonds, which _
inject additional reserves into the banking system, drains reserves from the banking system
in 2008, the fed also began making loans to non bank financial institutions ( such as _ companies and _) for lengthy time periods (_-_ years)
insurance, brokerage firms, 5, 10
the payment of _ provides the fed with another tool it can use to control the money supply
interest on reserves
setting the interest rate paid banks on reserves held at the fed
interest paid on bank reserves
Most economists now rely on a combination of factors, such as _, to evaluate the direction and appropriateness of monetary policy.
interest rates and growth of nominal GDP
The main purpose of the Fed is to
maintain the proper functioning of our money system.
Banks hold a portion of their assets as reserves (either as cash or deposits with the Fed) to
meet their daily obligations toward their depositors
prior to 2008, the fed extended only short term discount rate loans, and they were extended only to _
member banks
equal to the currency in circulation plus the reserves of commercial banks (vault cash & reserves held at the Fed).
monetary base
important because it provides the foundation for the money supply.
monetary base
Innovations and dynamic changes have altered the nature of money. Economists now place less emphasis on the growth rate of the money supply figures as a
monetary policy indicator
The Fed pushed the interest rate on Treasury bills and other short-term loans to
near zero
credit card purchases are _
not money
buying and selling of U.S. government securities (and other assets) in the open market
open market operations
primary tool used by the federal reserve to control the money supply
open market operations
the buying and selling of US treasury bonds and other financial assets by the fed
open market operations
The lower the percentage of the reserve requirement, the greater the
potential expansion in the money supply resulting from the creation of new reserves.
-is concerned with the finance of federal expenditures -issues bonds to the general public to finance the budget deficits of the federal government -does not determine the money supply
the US treasury
Prior to the financial crisis of 2008, the fed controlled the money supply almost exclusively through open market operations- _
the buying and selling of treasury securities
The main thing that makes money valuable is the same thing that generates value for other commodities:
the demand (for money) relative to its supply
a 12-member board that establishes Fed policy regarding the buying and selling of government securities.
the federal open market committee
-is concerned with the monetary climate of the economy -does not issue bonds -is responsible for the control of the money supply and the conduct of monetary policy
the federal reserve
responsible for the conduct of U.S. monetary policy.
the federal reserve
responsible for the creation of a stable monetary climate for the entire U.S. economy. • It controls the supply of U.S. dollars, • serves as a "banker's bank" or "bank of last resort" for U.S. banks, and, • regulates the banking sector.
the federal reserve
is designed to strengthen the ability of the Fed to pursue monetary policy in a stabilizing manner.
the independence of the federal reserve system
If a sizeable amount of U.S. currency is held outside of the United States,
the money supply figures, particularly those for M1, will be less reliable.
M2 (a broader measure of money) includes:
-M1 - savings deposits - time deposits - money market mutual funds
The banking industry includes:
-commercial banks -savings and loans - credit unions
Fiat money is money
that has little intrinsic value and is not backed by a commodity.
The components of M1 are:
-currency -checking deposits (including demand deposits and interest earring checking deposits) - travelers checks
Actual deposit multiplier will be less than the potential because:
-some persons will hold currency rather than bank deposits, and, - some banks may not use all their excess reserves to extend loans.
A bank receives a demand deposit of $1,000. The bank loans out $600 of this deposit and increases its excess reserves by $300. What is the legal reserve requirement?
10 percent
A reserve requirement of 5 percent implies a potential money deposit multiplier of
20
If the banking system has $50 billion in excess reserves, and the required reserve ratio is 25 percent, what is the maximum amount by which the money supply can be increased?
200 billion
in response to the _ recession, the feds asset holdings skyrocketed
2008-2009
banking institutions are required to maintain _ reserves against transaction account deposits of over 15.2 million and _ for the amounts over 110.2 million
3%, 10%
Suppose the Fed sells $100 million of U.S. securities to the public. If the reserve requirement is 20 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves both before and after the transaction, the total impact on the money supply will be a
500 million decrease
Suppose the Fed bought $150 million of U.S. securities from the public. The reserve requirement is 20 percent, and there are no initial excess reserves. A few weeks later, if the public's holdings of currency are constant and the banks have loaned all excess reserves, the money supply will increase by
750 million
Fed independence stems from:
Lengthy terms for the individual members of the Board of Governors (14 years) • However, the impact of the lengthy terms may be more apparent than real. Because of attractive private sector alternatives, the average tenure of fed governors appointed since 1980 has declined to less than five years. • The Fed derives its revenue from interest on the bonds that it holds rather than allocations from Congress
Two basic measurements of the money supply are _ and _
M1, M2
Which of the following provides the best explanation of why money is valuable?
Money is valuable because it is scarce relative to the demand for the services it provides.
the fed began paying banks interest on their reserves in _
October 2008
Under a fractional reserve system, an increase in deposits will provide the bank with _ and place it in a position to extend additional loans, and thereby expand the money supply.
excess reserves
the Board of Governors of the Federal Reserve System is located in
Washington DC
The type of banking system under which banks are required to hold only a portion of their assets in reserve against the checking deposits of their customers is called
a fractional reserve banking system
Money is an asset used to buy and sell goods and services.
a medium of exchange
Money is an asset that allows people to transfer purchasing power from one period to another.
a store of value
Money is a unit of measurement used by people to post prices and keep track of revenues and costs
a unit of account
money is an _
asset
Banks provide services and pay interest to
attract checking, savings, and time deposits
Most of these deposits are invested and loaned out, providing interest income for the
bank
Banks accept deposits and use part of them to extend loans and make investments. Income from these activities is their major source of revenue
banks are profit seeking institutions
They help bring together people who want to save for the future with those who want to borrow for current investment.
banks play a central role in the capital market (the loanable funds market)
the _ is at the center of the federal reserve operations
board of governors
the _ sets all rates and regulations for the depository institutions
board of governors
when the fed sells bonds the money supply contracts because
bond buyers exchange money for bonds, bank reserves decline which causes them to extend fewer loans
when the fed buys bonds the money supply expands as _
bond sellers acquire money (check from the fed), bank reserves increase, placing banks in a position to expand the money supply through the extension of additional loans
The currency in circulation contributes directly to the money supply, while the bank reserves provide the underpinnings for _.
checking deposits
Each of the district banks monitor the _ in their region and assists them with the clearing of checks.
commercial banks
while media often focuses on the feds target fed funds rate, open market operations are used to _
control this interest rate
The use of a credit card is merely a _
convenient way to arrange for a loan
during 2008, the fed reduced its holding of treasury securities, but vastly expanded its purchase of _. moreover, there was a huge increase in fed loans to non banking institutions such as brokerage firms and insurance companies
corporate bonds, mortgage backed securities, and commercial paper issued by private business
in 2008, the fed established several new procedures for the extension of _ and began _, including some to non-banking institutions
credit, extending longer term loans
raising the reserve requirements _
decreases the money supply
Demand deposits are
deposits of individuals that can either be withdrawn or made payable on demand to a third party by a check.
the interest rate the fed charges banks for short term loans needed to meet reserve requirements
discount rate
In order for barter trades to occur, there must be a
double coincidence of wants.
Increases in the Fed's asset holdings reflect expansionary monetary policy
quantitative easing
People demand money because it
reduces the transaction cost of exchange
The funds that banks are required by law to hold in the form of either vault cash or deposits with the Fed are called
required reserves.
setting the fraction of assets banks must hold as reserves (vault cash or deposits with the Fed), against their checking deposits
reserve requirements
the fraction banks must hold on reserves (vault cash and deposits with the fed) against their checking deposits
reserve requirements
The Fed has 4 major tools it can use to control the money supply:
reserve requirements, open market operations, extension of loans, and interest paid on bank reserves
Vault cash and deposits held with the Federal Reserve count as
reserves
an increase in the discount rate will reduce borrowing from the fed and thereby exert a _
restrictive impact on the money supply
Raise reserve requirements because this will reduce the excess reserves of banks and induce them to make fewer loans, which will contract the money supply.
restrictive monetary policy
Extend fewer loans because this will decrease bank reserves, discourage bank loans, and reduce the money supply.
restrictive monetary policy- extension of loans
Increase interest paid on excess reserves because this will induce banks to hold more reserves and extend fewer loans, which will contract the money supply.
restrictive monetary policy- interest paid on excess bank reserves
Sell U.S. securities and other assets, which will decrease the money supply and also contract the reserves available to banks.
restrictive monetary policy- open market operations
slow growth (or a contraction in the money supply) was indicative of
restrictive policy
Increased use of debit cards & various forms of electronic money have reduced the demand for currency. Like other changes in the nature of money, these innovations have reduced the reliability of the money supply figures as an indicator of monetary policy.
substitution of electronic payments for checks and cash
since 2011, the fed was paying member banks an interest rate equal to the _ on both required and excess reserves
target federal funds rate
member banks have borrowed from the fed, primarily to meet _
temporary shortages of reserves