Money, Banking And The FED part 1 Flashcards Preview

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Flashcards in Money, Banking And The FED part 1 Deck (53):
0

What are the three functions of money

Act as a medium of exchange, a unit of measure other known as a unit of account, and a store of value

1

The function of money that allows you to save value of labor to be used at a later date

Store of value

2

Function of money that allows you to trade for goods and services more easily than bartering

Medium of exchange

3

Function of money that allows you to precisely calculate the value of a good or service in the utility provided

Unit of measure or unit of account

4

What are the two types of money

Commodity money and Fiat money

5

Type of money that has value outside of being money
For example coins made from gold or another precious metal

Commodity money

6

Type of money that has no value outside of being money

Example is paper currency

Fiat money

7

This is the representation of some value

Money

8

What are the characteristics of modern money that makes it a good medium of exchange

Easily divisible
Easily transportable
Durable
Universal acceptance
Difficult to reproduce

9

The ability of an asset to be used to make purchases in simple terms easy to convert an asset into cash

Liquidity

10

What are highly liquid forms of money

Cash checks savings accounts

11

What are less liquid forms of money

Bonds collectibles Stocks jewelry

12

What does liquidity determine

What counts as actual money in the economy

13

What is liquidity closely connected to

Interest rates

14

Measure that is 100% liquid

M1

15

What all is included in M1

Cash, coin, checking accounts, travelers checks

2.8 trillion

16

Slightly less liquid than M1, earns interest, usually sits for a a while

M2

17

What does M2 include

M1, savings accounts, money market accounts, time deposits, money market mutual funds

the above accounts must be less than $100,000
11 trillion

18

Broadest measure of money

M3

19

What does M3 include

M2 plus time deposits over $100,000 and large money market mutual funds

20

What type is used to buy things and what type is short-term savings

M1 to buy, and M2 for short-term savings

21

What is a pure money what is a near money

Pure money is the liquid M1

Near money is an asset that does not function directly as a medium of exchange but can readily be converted into M1
It is M2

22

How many times is each dollar used

Multiple times this should not be confused with GDP

23

What is money in relation to economic activity

Money influences economic activity it is not equal to it

24

What is fractional reserve banking

Keeping a fraction of deposits in reserve to pay back customers

based on old-fashioned gold banking

25

What are the risks in fractional reserve banking

Runs on the bank

Make too many loans in search of a irrational profits

Inflation may result from rapid creation of money

26

Things of value that the bank owns

Examples cash, deposits, loans, real estate, reserves

Assets

27

Things of value the bank owes

Examples deposits, loans

Liabilities

28

Percent of deposits set-aside by law to repay customers

Reserves

29

What is the relation between assets and liabilities

Assets must exceed liabilities or the bank is in trouble

30

Amount left over after the required reserves this amount can then be loaned out

Excess reserves

31

Legal minimum the bank must set aside

Required reserves

32

What is this formula for the simple deposit multiplier

One over required reserves

33

What are the two critical assumptions that must be made in order for the multiplier to work

All money must be redeposited
All excess reserves must be reloaned

34

When determining the new money put into the economy what must be taken into account

Subtracting by the initial amount

35

What is the jobs of the Federal Reserve

Regulate the financial system
Act as the governments bank
Act as a lender of last resort during a liquidity crisis
Conduct monetary policy by controlling the money supply

36

What does the federal reserve do even though it sits outside of the circular flow

Heavily influences the financial/banking sector

Conduct monetary policy

Connects the government to the financial market

37

What is the organization of the Federal Reserve

Board of governors

12 district banks

FOMC ( Federal open market committee)

38

Seven members on a 14 year term

Make big picture financial decisions

Yellen is the first woman chair person

Board of governors

39

Chosen by member banks
Carry out federal goals/jobs at the regional level

12 district banks

40

Most important
Seven governors in five regional presidents one president is always from New York
Make monetary policy decisions control money supply

Federal open market committee

41

Altering the money supply to steer economic activity

Monetary policy

42

Increase money supply increase GDP decrease unemployment

Expansionary monetary policy

43

Decrease money supply decreased GDP decreased inflation

Contractionary monetary policy

44

Meet eight times per year to decide what the economy needs moneywise to meet goals maximum output stable prices low unemployment

Federal open market committee

45

When it comes to monetary policy what are the tools of the Federal Reserve

Reserve requirements

Discount rates

Open market operations

46

This changes the banks reserves and the multiplier

Reserve requirement

47

This changes the interest-rate that the federal reserve charges member banks to borrow

Discount rate

48

Buying or selling bonds to change the federal funds rate

Open market operations

49

What is the most effective tool when it comes to monetary policy

Open-market operations

50

What is often used as a signal indicating where the Federal Reserve wants to go in monetary policy

Discount rate change

51

Why is the reserve requirement change rarely used except during a huge crisis

Yes it is too strong it has a double effect on the monetary base
either adds or subtracts reserves that the banks can use to lend to customers and changes the simple deposit multiplier affecting the amount of money that banks can create

52

What is the federal funds rate

The rate the banks charge each other to borrow money