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Macroeconomics > Chapter 30 Money, Banking, And The Federal Reserve System > Flashcards

Chapter 30 Money, Banking, And The Federal Reserve System Flashcards

1
Q

What is money?

A

Any asset that can easily be used to purchase goods and services.

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2
Q

Define currency in circulation.

A

Actual cash in the hands of the public.

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3
Q

What are the definitions of the money supply?

A

The total value of financial assets in the economy that are considered money.

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4
Q

What are the roles of money?

A

Medium of exchange
Store of value
Unit of account

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5
Q

What is a unit of account?

A

A commonly accepted measure individuals use to set prices and make economic calculations.

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6
Q

Define commodity money.

A

The medium of exchange is a good.

Ex: gold or silver

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7
Q

What is commodity-backed money?

A

Bills that are promissory notes from banks for the equivalent value of a commodity.

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8
Q

What is a fiat?

A

A historical term for a policy declared by a ruler.

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9
Q

What is a monetary aggregate?

A

An overall measure of the money supply.

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10
Q

What does M1 consist of?

A

It is the monetary aggregate that measures cash in circulation and traveler’s checks and checkable bank deposits

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11
Q

What is M2?

A

M1+several other near-moneys.

Such as savings accounts, small denom. CDs,

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12
Q

When did the US govt. start printing money?

A

During the civil war.

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13
Q

When did Franklin D Roosevelt disconcintue the dollars commodity gold-backing?

A

1933

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14
Q

When was the gold window?

A

1971

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15
Q

What is currency in bank vaults and bank deposits at the federal reserve called?

A

Bank reserves.

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16
Q

Are bank reserves part of the currency in circulation?

A

No.

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17
Q

What is the ratio of a bank’s deposits to it’s reserves?

A

The reserve ratio.

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18
Q

How do bank runs lead to bank failures?

A

A bank run causes a bank to sell its assets to meet the depositors demands. Bank assets are usually loans and in order to sell loans quickly they must be sold at discounts. Since deposits were used to make those loans and they are being sold at discounts, the bank can not give all the depositors their money.

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19
Q

What are the three main features of bank regulation?

A

Deposit insurance
Capital requirements
Reserve requirements

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20
Q

What is a bank’s capital?

A

The excess in a banks assets to its liabilities.

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21
Q

What is the discount window?

A

The ability to borrow money from the federal reserve to avoid a fire sale of its assets in the event of a bank run.

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22
Q

How do banks create money?

A

They are not required maintain full liquidity for their depositors so they make loans. When a loan is made, the checkable account the money is taken from doesn’t decrease but the money is till loaned out.

23
Q

What is the money multiplier?

A

The way that banks create money has an ongoing effect. It is the ratio of the money supply to the monetary base.
Checkable bank deposits/bank reserves

24
Q

What are a bank’s reserves above the reserve requirement called?

A

Excess reserves.

25
Q

What is the sum of bank reserves and money in circulation called?

A

The monetary base. Which is what the fed controls. The monetary base does not include checkable bank deposits.

26
Q

How is the multiplier calculated?

A

Initial increase in money x reserve ratio = Total increase in money supply

27
Q

How is the real money multiplier calculated?

A

The ratio of the money supply to the monetary base. In the US it was about 1.9 in 2009.

28
Q

When was the fed created?

A

1913

29
Q

What are the two parts of the federal reserve system?

A

The Board of Governors and the 12 regional Federal Reserve Banks

30
Q

How are the seven members of the Board of Governors appointed?

A

By the president and approved by the Senate.

31
Q

How long are the Board of Governors appointed for?

A

14 years to insulate them from political pressure.

32
Q

How often is a chairman of the fed appointed?

A

Every 4 years. But it’s traditional for chairmen to serve multiple terms.

33
Q

How is each regional fed bank administrated?

A

By a board of directors chosen from the local banking and business community.

34
Q

Who audits the books of private sector banks to ensure financial health?

A

The regional fed banks.

35
Q

What special role does the fed bank of New York play?

A

It is in charge of open market operations.

36
Q

Who makes the decisions about monetary policy?

A

The Federal open market committee which consists of the board of governors plus five of the regional bank presidents.

37
Q

What are the three main policy tools that the Fed uses?

A

Reserve requirements, the discount rate, and open market operations.

38
Q

What happens to banks that fail to maintain at least the required reserve ratio on average over a two-week period?

A

They get penalized.

39
Q

What does a bank do to boost its reserves to meet the feds reserve requirement?

A

It can borrow additional funds from other banks via the federal funds market. Banks can also borrow from the fed via the discount window.

40
Q

What is the federal funds rate?

A

The rate which is determined by supply and demand within the federal funds market.

41
Q

What is the discount rate?

A

The interest rate the federal reserve charges banks getting funds at the discount window.

42
Q

What are Federal Reserve open market operations?

A

A purchase or sale of government debt.

43
Q

What happens if the Fed reduces reserve requirements?

A

Banks will lend a larger percentage of their deposits, leading to more loans, and an increase in the money supply via the money multiplier.

44
Q

What happens if the Fed reduces the spread between the discount rate and the fed funds rate?

A

The costs to banks of being short of reserves balls; banks respond by increasing their lending, and the money supply increases via the money multiplier.

45
Q

What are the Federal Reserve’s assets?

A

Debt issued by the US government such as US treasury bills (US government bonds with a maturity of less than one year) and bonds.

46
Q

What are the US Federal Reserve’s liabilities?

A

Currency in circulation and bank reserves

47
Q

Does the Federal Reserve ever by U.S. Treasury bills directly from the federal government?

A

No

48
Q

When was the European Central Bank created?

A

January 1999

49
Q

How did the panic of 1907 start?

A

When trusts in New York engaged in high-risk activities. Because trusts were less regulated and had lower reserve requirements, trusts grew very popular. After the failure of the Knickerbocker trust there was a “trust run”.

50
Q

What is the Glass-Steagall act of 1932?

A

It created federal deposit insurance and increased the ability of banks to borrow from the fed.

51
Q

What was the Glass-Steagall act of 1933?

A

It separated banks into two categories- commercial banks (depository banks that accepted deposits are covered by deposit insurance ) and investment banks (which engage in creating and trading financial assets and they don’t have deposit insurance)

52
Q

What is regulation Q?

A

It prevented commercial banks from paying interest on checking accounts, and in the belief that this would promote unhealthy competition between banks. It was repealed in 1980

53
Q

What is the balance sheet effect?

A

The reduction in a firm’s net worth from falling asset prices.

54
Q

What is the vicious cycle of deleveraging?

A

When asset sales to cover losses produce negative balance sheet effects on other firms and force creditors to call in their loans, forcing sales of more assets and causing further declines in asset prices

Macroeconomics (7 decks)

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