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40 Cards in this Set
- Front
- Back
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Money |
Any asset that is widely used by the non-banking public as a medium of exchange |
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Money v Income |
Money=Stock variable Income=Flow variable |
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Stock variable |
"as of" an exact date |
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Flow variable |
"during" a continuous period of time |
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1980 Act |
Established the measurement of money as M1 and M2 |
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M1 |
Currency + All checkable accounts
(Narrow measurement of money) |
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M2 |
M1 + Small time and savings accounts
Broad measurement of money |
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Time v. Savings accounts |
Time--fixed maturity date, higher rates Savings--non-fixed maturity date, lower rates |
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M1 v. Time and Savings accounts |
M1--motivated by transactions TS accounts--motivated by interest |
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Commodity money |
Money made out of a valuable commodity (ex. gold+silver coins) |
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Fiat money |
Money made out of worthless commodity (ex. paper bills)
Gets worth because government establishes it as "legal tender" |
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Three functions of money |
1. Medium of Exchange 2. Unit of Account 3. Store of value |
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Money as: Medium of Exchange |
The method of payments
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Money as: Unit of Account |
Other goods evaluated in terms of money |
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Money as: Store of Value |
Inflation erodes value of money Deflation increases value of money |
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Bank |
A profit-maximizing business firm that accepts deposits, lends money, buys securities, and is liable to the Fed |
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Assets of a bank |
Non-interest bearing assets Interest bearing assets |
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Interest-bearing assets |
How banks make profits 1. Loans 2. Securities |
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Loans |
Banks will lend to all kinds of customers
Offer prime (best) rates to best business customers
Are more risky than securities |
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Securities |
Government securities or corporate bonds
Higher liquidity than loans
(T. Bills, T. Notes, T. Bonds) |
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T. Bills |
Form of government security that has a short-term maturity date of less than 12 months |
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T. Notes |
Form of government security that has a medium-term maturity date of 12 months to 10 years |
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T. Bonds |
Form of government security that has a long-term maturity date of more than 10 years |
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Non-Interest Bearing Assets |
Banks collect no interest Is the safety of the bank 1. Vault cash 2. Reserve Deposits |
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Vault Cash |
Cash within a bank's vault |
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Reserve Deposits |
Money deposited at the Fed
(Ruston's Fed is in Dallas) |
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Minimum Reserve Requirements |
Banks required to keep percentage of assets in liquid form, not in Interest-bearing accounts |
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Borrowed funds |
Option when banks are low on funds and don't want to sell securities
1. From Fed at Discount Rate (det. by Fed) 2. From other banks at Federal funds rate (det. by availability of funds/market) |
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Bank capital |
A bank's net worth TA-TL |
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FDIC |
Federal Depository Insurance Company (up to $250,000 as of 2008) |
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Two ways to create demand deposits |
1. Customers deposit cash into a new account 2. Investment activities (preferably in new acct) |
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Equilibrium |
When a bank has the "right" amount in reserves
(rD*D) + (rT*T) + ER = B - Kp |
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Supply of Reserves |
VC + RD = Rs
Kb + RD = Rs |
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Monetary Base |
B = Kp + Kb + RD |
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Minimum Required Reserve Ratio |
Amount banks must keep reserved against demand and time deposits |
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Demand of Reserves |
(rD*D) + (rT*T) + ER |
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Net Monetary Base |
Bn = B - Kp - (rT*T) - ER |
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Demand Deposit Multiplier |
1/rD
Higher rD , Lower multiplier |
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Money Supply Model |
M1 = Kp + (1/rD)[B - Kp - (rT*T) - ER]
The Fed controls rD and rT (-) and B (+) Banks affect ER (-) Public affects T and Kp (-) |
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MS |
= f(B, rD, rT, Kp, T, ER, i) |
