Macro Economics Chapter 15 Power Point Flashcards

1
Q

The Federal Reserve (the Fed) and banks work together to influence?

A

the supply of money

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2
Q

In the Middle Ages, what was used for money?

A

Gold was the money of choice in most European nations.

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3
Q

Who were the founders of our modern-day banking?

A

Goldsmiths, people who would keep other people’s gold safe for a service charge.

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4
Q

What was the first currency?

A

People would use the receipts they received from goldsmiths as paper money.

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5
Q

How did the early goldsmiths act as the first banks?

A

Some goldsmiths made loans and received interest

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6
Q

Where do banks get their money to lend?

A

From depositors

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7
Q

What is fractional reserve banking?

A

A system in which banks keep only a small percentage of their deposits in reserve.

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8
Q

What are required reserves?

A

The minimum balance that the Fed requires a bank to hold in vault cash or on deposit with the Fed.

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9
Q

What is a required reserve ratio?

A

The percentage of deposits that the Fed requires a bank to hold in vault cash or on deposit with the Fed

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10
Q

What is the Required Reserve Ratio of the Fed?

A

7.8 million through 48.3 million = 3%Over 48.3 million = 10%

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11
Q

What are excess reserves?

A

Potential loan balances held in vault cash or on deposit with the Fed in excess of required reserves.

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12
Q

What money do banks use to lend out?

A

Banks are allowed to loan money taken from their excess reserves.

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13
Q

What are total reserves?

A

Total reserves equal required reserves plus excess reserves.

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14
Q

What are three steps in the multiplication of money?

A

•accepting a new deposit•making a loan•clearing the loan check

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15
Q

When will the money supply increase?

A

The money supply increases when banks lend money to borrowers.

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16
Q

What is the money multiplier?

A

Because money is passed from person to person, there is a multiple effect on any initial money banks lend to borrowers.

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17
Q

What is the money multiplier equal to?

A

1 / required reserve ratio

18
Q

If the reserve ratio is one tenth, what is the multiplier?

A

1 / 1/10 = 10

19
Q

If the reserve ratio is one twentieth, what is the multiplier?

A

1 / 1/20 = 20

20
Q

What conclusion can we make?

A

There is an inverse relationship between the size of the required reserve ratio and the money multiplier

21
Q

Actual money supply change

A

Initial change in excess reservesMoney multiplier.

22
Q

Can the multiplier be smaller than indicated?

A

Yes, because of cash leakages and the chance that banks will not use all of their excess reserves to make loans.

23
Q

What is an example of a leakage?

A

When people receive money but decide to save the entire amount instead of spending most of it.

24
Q

What is monetary policy?

A

The Fed’s use of policy tools to change the money supply.

25
Q

What would the Fed do when we have unemployment?

A

Increase the money supply.

26
Q

What would the Fed do when we have inflation?

A

Decrease the money supply.

27
Q

How does the Fed effect a change in the money supply?

A

It will use its monetary tools to influence banks.

28
Q

How does the Fed influence a bank?

A

•open market operations•change in the discount rate•change in the required reserve ratio.

29
Q

What are open market operations?

A

The buying and selling of government securities

30
Q

What would the Fed do if we have unemployment?

A

Buy securities; this will increase the money supply.

31
Q

What is the discount rate?

A

The interest rate the Fed charges on loans to banks.

32
Q

What would the Fed do with unemployment?

A

Decrease the discount rate

33
Q

What would the Fed do if we have inflation?

A

Increase the discount rate

34
Q

What is the federal funds market?

A

A private market in which banks lend reserves to each other for less than 24 hours.

35
Q

What is the federal funds rate?

A

The interest rate banks charge for overnight loans of reserves to other banks.

36
Q

What would the Fed do with unemployment?

A

Decrease the federal funds rate

37
Q

What would the Fed if we have inflation?

A

Increase the federal funds rate

38
Q

What is the reserve ratio?

A

The Fed determines how much a financial institution must keep in reserve as a percentage of its total assets.

39
Q

What would the Fed do if we had unemployment?

A

Decrease the reserve ratio

40
Q

What would the Fed do if we had inflation?

A

Increase the reserve ratio

41
Q

Is changing the reserve ratio a popular monetary tool?

A

No, changing the reserve ratio generates some instability and is thus infrequently used.

42
Q

What are shortcomings of monetary policy?

A

•multiplier inaccuracy•competition of nonbanks•definition of money•lag effects