the federal reserve system

Question 1

what are the three functions of moiney?

Answer 1

means of payment
unit of account
store of value

Question 2

what is some criteria of money that makes it a suitable medium of exchange?

Answer 2

1) acceptable
2) standardized quality
3) durable
4) valuable relative to its weight
5) divisible

Question 3

what is M1 and M2?

Answer 3

M1 is the most liquid forms of money inlcuding physical currency like coins and notes, demand deposits held by businesses and people.

M2 includes everything in M1 and other less liquid assets like savings, time deposits, money market mutual funds. SO assets not as readily available as M1

Question 4

what is liquidity?

Answer 4

a measure of the ease with which an asset can be turned into a means of payment

more costly an asset it is to turn into money, less liquid it is

Question 5

what is the monetary base?

Answer 5

bank reserves held at the fed and currency outstanding

Question 6

what is a balance sheet?

Answer 6

a financial statement showing a firm’s assets, liabilites and net worth at a point in time

Question 7

what is the formual for net worth/stockholder’s equity?

Answer 7

assets - liabilities

Question 8

what is a fractional reserve banking system?

Answer 8

a banking system where banks keep less than 100% of deposits as reserves

Question 9

what are required reserves , excess reserves?

Answer 9

required reserves are required by law and any extrea reserve is called excess reservce

required reserve + excess reserve = reserves

Question 10

what is a single deposit multiplier

Answer 10

ratio of amount of deposits to amount of new reserves created by banks when banks are fully loaded out.

Question 11

what is the equation for single deposit multiplier Mdd?

Answer 11

Mdd = 1 / (reserve ratio RRR + excess reserve ration ERR + ratio of cash to deposit of currency RC)

Question 12

what arr major responsibilities of the fed?

Answer 12

1) regulates banks
2) acts as a bank for banks
3) controls the money supply

Question 13

how does the fed control money supply?

Answer 13

using open market operations

when feds buy securities it injects reserves into the banking system allowing banks to make new loans
leading to total supply of money increasing

when feds sell securities, it removes reserves from the banking system reducing money supply

Question 14

what is the relationship between the demand deposit multiplier and the required reserve ratio and reserve ratio?

Answer 14

negatively related

Question 15

how does the multiplier work?

Answer 15

the multiplier is weakend by the public’s desire to hold cash and bank’s desires to hold excess reserves

Question 16

what are the monetary policies of the Fed?

Answer 16

1) open marketr operations - buying and selling govt bonds in open market

2) discount rate lending and term auctional facility - federal reserve lending to banks

3) required reserve - changing minimum RR ( not common)

4) payment of interest on reserves - paying interest on reserves held by banks at the Fed

Question 17

how does the open market operations work and what is the downside to it?

Answer 17

the feds attempt to control the real rate of interest but it is effective in short run not long run.
but the control is on nominal not real.
so in lending and borrowing, it depends on real interest rate.
aggregate spending on investment depends on real interest rate but the feds influence is on the short term interest rates

Question 18

what is the fed funds market and how is it related to the monetary policy?

Answer 18

the fed funds market is the market where banks are borrowing and lending funds from their deposit balances at the fed
the monetary policy sets a target fed funds rate which is determined in the market. the fed influences this through the supply side of the market

Question 19

what is the discount rate in the fed funds market?

Answer 19

it is the corridor that is defined by the discount rate and deposit rate (rate paid by feds on reserves held at fed)
interest feds charges banks for loans

Question 20

what is the deposit rate?

Answer 20

rate paid by feds on reserves held at fed