4. Money and Banking Flashcards
Currency is general, money is narrow
What is Money?
Medium of Exchange: Can be exchangeable for something else
Store of Value: Has value and not always spent right away
Unit of Account/Measurement: Has a unit of measure (anything)
Functions of Money
Federal Reserve Bank created to list monetary items based on order of liquidity
Monetary Aggregates
More strict
Currency
Demand Deposit Accs (Checkings)
Other checkable accs (Savings)
Travelers accs
M1
More lenient
All M1 items
Small item deposits (<$100)
Retail MMMFs (Money Market Mutual Funds <$100)
M2
Personal checks
Gold, silver, bronze
Credit/Debit card itself
Real Restate value
Not listed Monetary Items
Banks are not required to keep 100% of each deposit on hand, just a small percentage (Reserve Ratio)
Fractional Reserve Banking
Deposits x Reserve Ratio (bank keeps)
Required Reserve
Actual reserves - required reserves (how much is left)
Becomes potential loans in the process again
Excess Reserve
Mde = 1/Reserve Ratio
Maximum multiplier, not all excess gets used and put back as loans again
Deposit Expansion Multiplier
- Handles the monetary policy, no fiscal policy
- Takes actions to stabilize economy
Board of Governors (7)
Federal Reserve District Banks (12)
- Banks for banks
- Issue Fed Res notes (currency)
- Check clearing
- Puts currency in/out of economy
Federal Open Market Committee (12)
- Policy makers
- Buy/sell gov’t securities
- Secondary market (open)
- Treasury has primary market
Federal Reserve System
Expansionary/Unemployment in order to increase money supply
1) Decrease reserve ratio
2) Decrease discount rates
3) Buy gov’t securities
Increasing AD
Restrictive/Inflation in order to decrease money supply
1) Increase reserve ratio
2) Increase discount rates
3) Sell gov’t securities
Decreasing AD
Monetary Policy Tools
Not the Fed
1) T-Bills: 3m, 6m, 1yr
2) T-Notes: 2, 3, 5, 7, 10yrs
3) T-Bonds: 30yrs
Treasury + Government Securities
