Ch. 15 Flashcards
(17 cards)
That income can either be saved (we then demand interest or “hold bonds”) or spent (we then
demand or hold money)
This involves setting aside a portion of income for future use.
It can be done through various methods like depositing money in savings accounts, investing in stocks or bonds, or purchasing other assets. By saving, individuals effectively lend money to others (like banks or corporations) and earn interest as a reward for delaying consumption.
This involves using income to purchase goods and services.
When people spend, they create demand for products and services, which stimulates economic activity.
That the price of money is the interest lost or sacrificed when income is held as money rather
than saving (opportunity cost) or the cost of borrowing other people’s income (money cost)
Holding Money: A trade-off between liquidity and earning potential.
Borrowing Money: A trade-off between immediate needs and future costs.
Money must have three characteristics: Store of value, be a medium of exchange, and be a unit
of account(ing)
Store of value: a certain amount of purchasing power that money retains over time
ex. you put a $100 bill in a safe, you can expect to be able to purchase $100 worth of stuff, whenever you take the bill out
Medium of exchange: the ability to use money to purchase goods and services
ex. labor for $
Unit of account(ing): a standard unit of comparison
ex. a farmer offers to pay you 12 cartons of eggs each week
That U.S. banks can hold only a fraction of their deposits as reserves and that there is no longer
a specific fraction required
Under a fractional reserve banking system, banks are only required to hold a fraction of their deposits as reserves. Historically, the Federal Reserve set specific reserve requirements for different types of deposits.
The components of a bank’s balance sheet and know that a bank’s assets, liability, and equity is
referring to
Assets = Liabilities + Equity
A= cash, reserves, loans, securities
L= deposits, borrowings
SHE= This represents the net worth of the bank, or the difference between its assets and liabilities. It’s the amount that would be returned to shareholders if the bank were liquidated.
That banks create money when they lend out their reserves, which increase the money supply in
the economy, and that the difference between deposits and reserves is made up of loans
generated by banks.
Be able to determine the money multiplier using the equation: 1 / reserve-deposit ratio
If the reserve-deposit ratio is 10% (or 0.10), the money multiplier would be:
Money Multiplier = 1 / 0.10 = 10
his means that for every $1 increase in the monetary base (e.g., through open market operations), the money supply can potentially increase by $10.
The monetary policy tools used by the FED: Discount Lending, Interest on Reserves, Forward
Guidance, and Open Market Operations.
o What happens with the money supply and interest rates when the Fed buys government
bonds, and when is this action most appropriate.
o What happens with the money supply and interest rates when the Fed sells government
bonds, and when is this action most appropriate
The advantages with monetary policy versus fiscal policy – including the shorter
implementation and impact lag, no new (increase in new) government debt, and no “crowding
out.”
Monetary policy offers the advantage of quicker implementation and impact, avoiding the need for new government debt, and minimizing the risk of crowding out private investment.
These factors make it a valuable tool for policymakers to stabilize the economy and promote economic growth
That higher money supply and lower interest cannot guarantee more spending; only create the
incentive for more spending – called a liquidity trap.
What the Federal Funds Rate is, and that the FED uses to communicate their policy intentions.
the interest rate at which banks choose to lend reserves held at the Fed to one another
open-market operations
the discount window
interest on reserve balances
Dual Mandate
the twin responsibilities of the Federal Reserve, to use monetary policy to ensure price stability and to maintain full employment
Open market operations
Fed’s sales or purchases of government bonds to or from banks on the open market
Discount window
the lending facility run by the Fed that allows any bank to borrow reserves
Interest on reserve balances
the overnight rate of return earned on reserve balances held at the Federal Reserve
Contractionary Monetary Policy:
Goal: Slows down economic growth to combat inflation.
Tools:
Raising interest rates
Selling government securities
Increasing reserve requirements for banks
