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