Chapter 15- Section 2 Flashcards
Requires banks and other depository institutions to keep a fraction of the deposits in the form of legal reserves
Fractional reserve system
The expansion or contraction of the money supply in order to influence the cost and the availability of credit
Monetary policy
Consists of coins and currency that the depository institutions hold in their vaults, plus deposits with Federal Reserve district banks
Legal reserves
Rules stating that a percentage of every deposit be set aside as legal reserves
Reserve requirement
Legal reserves in excess of the reserve requirement
Excess reserves
Excess reserves are the funds the bank can what?
Lend to others who may want a loan
The debtss and obligations to others
Liabilities
The properties, possessions, and claims on others
Assets
A condensed statement showing all assets and liabilities at a given time
Balance sheet
The excess of assets of liabilities, which is a measure of the value of a business
Net worth
What side are the assets on on a balance sheet and what side are the liabilities and net worth on a balance sheet?
Assets on the left; liabilities and net worth on the right
How does the T-account work like an equal sign?
Entries on the left must always be equal to the entries on the right
The size of the reserve is determined by what?
The reserve requirement
The income from loans and other income is used to pay what?
Officers and employees, It’s utility bills, taxes, other business expenses, and its stock dividends
The potential to be converted into cash in a very short time
Liquidity
What’s the difference between saving accounts and time deposits?
Prior notice must be given to withdraw time deposits, while no prior notice is needed to withdraw savings.
The fractional reserve system allows what?
Money supply to grow to several times the size of the reserves the banking system keeps
A deposit a member bank keeps at the Fed to satisfy reserve requirements
Member bank reserve (MBR)
Because each new loan is smaller than the one before, the money supply will stop growing at some point. True or false?
True
The Fed allows this money supply to grow and interest rates to fall, which normally stimulates the economy
Easy Money policy
The Fed restricts the growth of the money supply, which drives interest rates up
Tight money policy
What is the first tool of monetary policy?
The reserve requirement; gives the Fed considerable control over the money supply
The buying and selling of government securities in financial markets
Open market operations; the second and most popular tool of monetary policy
Open-market operations affect the amount of what in banks?
Excess reserves, and the ability of banks to support new loans
