Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
64 Cards in this Set
- Front
- Back
|
Money is
|
Any commodity or token that is generally accepted as a means of payment.
|
|
|
M1 =
|
= Currency held by individuals and businesses
+ Traveler’s Checks Checkable deposits owned by individualsand businesses ---------------------------- M1 ** Does not include currency inside banks |
|
|
M2 =
|
= M1
+ Savings Deposits Small time deposits Money Market Funds Other Deposits --------------------------- M2 |
|
|
3 Vital Functions of Money:
|
Medium of Exchange, Unit of Account, A Store of Value
|
|
|
Blank Checks
|
Are not money
|
|
|
Checkable deposit and $ are:
|
All 3 functions
|
|
|
A Bank must balance:
|
Security for depositors against profit for stockholders
|
|
|
The goal of a commercial bank is to:
|
maximize its stockholder’s long-term wealth
|
|
|
A Bank makes a profit by:
|
lending at a higher interest rate than what it pays for deposits
|
|
|
Pay interest on:
|
Checkable deposits(perhaps), savings deposits, and time deposits
|
|
|
Receive interest on:
|
government securities and home loans
|
|
|
Monetary Base =
|
= Coins
+ Federal Reserve Notes Banks’ Reserves at the Fed ----------------------- Monetary Base (Sum of Currency outside the bank + banks’ deposits at central bank) |
|
|
Fed Assets:
|
Gold and deposits in other central banks, U.S. Government Securities, Loans to Banks
|
|
|
The Federal Reserve is:
|
The Central Bank of the US
|
|
|
Central Bank
|
A public authority that provides banking services to banks and regulates financial institutions and markets
|
|
|
Banks Reserves
|
Currency in bank’ vaults + deposits at central bank
|
|
|
Fed Policy Tools change demand or supply in:
|
Monetary Base
|
|
|
Monetary base changes:
|
Interest Rate
|
|
|
Interest Rate Rises if:
|
Required Reserve Ratio increases, Discount rate rises, Securities in open market are sold
|
|
|
Increasing Required Reserve Ratio:
|
Forces banks to hold larger quantity of monetary base
|
|
|
Raising discount rate:
|
More costly for banks to borrow reserves/monetary base
|
|
|
Selling securities:
|
decreases monetary base
|
|
|
Fed’s most important tool:
|
open market operation
|
|
|
When a bank makes a loan:
|
it creates a new deposit for the person who received the loan
|
|
|
The amount of loans and new deposits that a bank can create is limited by:
|
: the amount of excess reserves and the required reserve ratio
|
|
|
Maximum amount of new money banks can create is determined by
|
initial excess reserves and required reserve ratio
|
|
|
Maximum amount of loans that can be created =
|
Max. amount of new money that bank can create
|
|
|
Banks Reserves =
|
Reserves at Fed + Cash in ATMs
|
|
|
Reserves increase by:
|
The amount of new deposits
|
|
|
Excess reserves after loans =
|
loan amount – (loan amount x req. reserve ratio)
|
|
|
Quantity of loans =
|
[excess reserves x (1/ Req. reserve ratio)] + total loans
|
|
|
Total deposits =
|
[excess reserves x (1/ Req. reserve ratio)] + total deposits
|
|
|
Money Multiplier=
|
change in the monetary base is multiplied to fine change in quantity of money
|
|
|
Currency drain and required reserve ratio determine:
|
Money Multiplier Magnitude
|
|
|
Fed sells securities to:
|
Banks or public but NOT Govt.
|
|
|
The fed makes purchases $1M securities from a bank:
|
: the bank’s reserves increase by 1M and deposits do not change. Now has excess reserves of $1M and can make loans and create new deposits which are new money
|
|
|
The fed sells $1M securities:
|
Required reserve ratio and currency drain determine the decrease in the quantity of money, the larger the RRR and CD the smaller the increase in quantity of money
|
|
|
Open Market Operation-
|
the purchase or sale of securities by the Fed
|
|
|
Open Market purchases:
|
increase the monetary base & creates excess reserves
|
|
|
Open Market Sales:
|
decrease the monetary base & decreases reserves
|
|
|
Fed makes sale of $1M securities, quantity of money:
|
decreases by $1M multiplied by the money multiplier
|
|
|
Fed makes purchase $1M securities magnitude of money multiplier:
|
(1+C) / (R+C), sign is positive, and quantity of money increases
|
|
|
If the fed wants to decrease the quantity of money it will:
|
sell securities to a bank or member of the public
|
|
|
Open Market Operation decreases money by:
|
decreasing banks excess reserves and creating a shortage, banks call in loans which destroys deposits and decreases the quantity of money
|
|
|
Money
|
is a RIGHT backed up by the fed
|
|
|
Store of Value
|
-asset sense
-little downside risk -liquid (compared to stocks) |
|
|
Functional Definition of Money
|
-medium of exchange vs. barter
-unit of account -Store of Value |
|
|
Money Market Funds
|
-don't have to be issued by banks
-Not insured by the Fed |
|
|
Excess Reserves
|
earn nothing
|
|
|
Not Money
|
-Bank Vault
-Checks and electronic debit cards -Credit Cards |
|
|
Assets
|
Cash Reserves
Overnight (Interbank) Loans Bonds Loans |
|
|
Liabilities
|
Deposits
Net Worth |
|
|
Liquidity
|
bottom to top
|
|
|
Profitability
|
Top to bottom
|
|
|
Overnight(Interbank) Loans
|
help banks meet their reserve requirements - browse fed. funds market
|
|
|
Government Securities =
|
bonds, stocks, etc.
|
|
|
Excess Reserves =
|
Actual Reserves - Required Reserves
|
|
|
Actual Reserves =
|
Cash on hand (vault cash) + Deposits at the Fed
|
|
|
Required Reserves =
|
%(determined by fed) x deposits
|
|
|
FOMC (Fed. open market commission)
|
7 Governorns
1 NY President 4 Others |
|
|
3 Tools of Fed
|
-Required Reserve Ratio
-Discount Rate -Open Market |
|
|
Discount Rate
|
rate at which banks can borrow from the fed
|
|
|
If Required reserve Ratio increases
|
Excess Reserves decrease
|
|
|
Change in M's
|
Change in excess reserves x Multiplier
|
