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89 Cards in this Set

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Economists use the word "money" to refer to ___
an asset regularly used to buy goods and services
Liquidity refers to ___
the ease with which an asset is converted to the medium of exchange.
Rank assets from most to least liquid

(stock) (currency) ( fine art)
currency, stocks, fine arts
Current U.S. currency is what kind of money? What value does it have?
fiat money with no intrinsic value
What is commodity money?
money with intrinsic value
The legal tender requirement means what?
people are more likely to accept the dollar as a medium of exchange
What is included in M1?
currency, demand deposits, and travelers' checks
What is included in M2?
Everything
Demand deposits are in which M ?
M1 and M2
Credit card balances are included in
Neither M1 nor M2
What is the average holdings of currency per person in the US?
3,600
Why is the average holdings of currency per person in the US so high?
1. Criminals may prefer currency
2. Dollars are used abroad a lot
Given the size of the U.S. money stock, what is puzzling about currency per person?
how much there is
Which agency is responsible for regulating the money supply in the US?
The Federal Reserve
How are Members of the Board of Governors selected?
They are appointed by the US president
How are presidents of the Federal Reserve regional banks selected?
They are appointed by the banks' boards of directors.
What part of the Fed meets every six weeks to discuss changes in the economy and determine monetary policy?
The FOMC
The NY Federal Reserve Bank's president always get to do what?
Vote at the FOMC meetings
The NY Federal Reserve Bank is located where?
the traditional financial center of the US
Who conducts open market transactions?
The NY Federal Reserve Bank
How are Board of Governors chosen?
They are appointed by the president and then confirmed by the senate.
How many regional banks are there in the Fed?
12
How many members of the Board of Governors are there?
7
How long is the term of a Board of Governor?
14 years
The Federal Reserve makes loans to individuals: True or False?
False
How long is the term of the Chair of the Board of Governors?
Four Years
Who regulates banks in districts?
The 12 regional Federal Banks
What is the Federal Open Market Committee made up of?
President of the NY Branch, 4 of the 12 presidents of the Federal Reserve Regional banks and 7 members of the Board of Governors
When the Fed manages the money supply, it most frequently does what?
conducts open market operations
What is money commonly known as?
a medium of exchange
What are the 3 functions of money?
Medium of Exchange
Unit of Account
Store of Value
What is a medium of exchange?
An item that buyers give sellers to purchase goods and services; may be anything accepted as payment
What is Unit of Account?
The yardstick people use to post prices and record debts.
What is Store of Value?
An item that people can use to transfer purchasing power from the present to the future.
What are the kinds of money?
Commodity and Fiat
Examples of Commodity money?
Gold, silver, cigarettes
What is fiat money?
Anything used as money because of a government decree
Examples of fiat money?
Coins, currency, check deposits
What kind of money are Check Deposits?
Fiat money.
What is Currency?
Paper bills and coins in the hands of the public.
What are Demand Deposits?
Balances in bank accounts that depositors can access on demand by writing a check.
What is in M1?
Demand Deposits
Traveler's Checks
Other checkable deposits
Currency
How much does M1 make up for?
1,696 billion
How much does M2 make up for?
8,544 billion
What is in M2?
All of M1 and

Saving deposits
Small time deposits
Money market mutual funds
How much currency per adult in the US?
3,653
What acts as the nation's central bank?
The Federal Reserve
What does the Federal Reserve do?
Oversees the banking system

Regulates the quantity of money
Who regulates the quantity of money?
The Federal Reserve
The Fed is run by who?
A Board of Governors
How many members of the Board of Governors are appointed by the President and confirmed by the Senate?
7
What does the Chairman of the Board of Governors do?
Directs Fed traffic, testifies on Fed policy, and presides over board meetings.
How are terms set in the Board of Governors?
Staggered with 14 year terms so a seat becomes vacant every 2 years
What makes up the Federal Reserve Board in Washington D.C.?
The Federal Reserve Board in Washington D.C. and 12 Federal Reserve Banks
How many directors of each Federal Reserve Banks?
9
How many directors of the Federal Reserve Banks are appointed by the Board of Governors?
Three
How many directors of the Federal Reserve Banks are elected by the commercial banks in the district?
Six
Who appoints the district president of the Federal Reserve Banks?
The directors of the banks, which is then approved by the Board
What does the Federal Open Market Committee do?
1. Make policies for the Fed
2. Meet every six weeks to review the economy
What is the FOMC made up of?
-Chairman and six members of the Board of Governors
-President of the NY Federal Reserve Bank
-Presidents of the other 11 regional Federal Reserve banks
Who conducts monetary policy?
The Federal Open Market Committee
What is Monetary Policy?
The setting of the money supply by policy makers in the central bank.
Who implements the Fed's most important policy decisions?
The New York Fed
What are the Three Functions of the Federal Reserve?
1. Banker's bank
2. Regulate banks to make sure they follow laws
3. FOMC conducts money supply control.
What is the primary way in which the Fed changes money supply?
Open-market operations of buying or selling government funds.
To increase money supply, what does the Fed do?
Buy government bonds from the public.
To decrease money supply, what does the Fed do?
Sell government bonds to the public.
What is fractional-reserve banking?
holding a fraction of money as reserves.
What is the Reserve Ratio?
The fraction of deposits that banks hold as reserves.
When a bank makes a loan from its reserves, what happens to the money supply?
It increases.
What are the 3 steps in fractional-reserve banking?
1. Accept Deposit
2. Keeps a portion as Reserves
3. Lends out the Rest
When a bank loans money, generally what happens to that money?
It gets deposited in another bank.
What is the Money Multiplier?
The amount of money the banking system generates with each doller of reserves.
Formula for Money Multiplier?
1 / R (decimal form)
What are the tools the Fed has for monetary control?
1. Open market operations
2. Changing reserve requirements
3. Changing discount rate
What is the role of the Fed Funds rate?
Buy securities means increased money supply and decreased interest.
Increasing reserve requirements does what to the money supply?
Decreases it
What is the discount rate?
The interest rate the Fed charges banks for loans
Increasing the discount rate does what?
decreases the money supply
Decreasing the discount rate does what?
increasing the money supply.
The Discount Rate and the Money Supply are _____ proportional.
indirectly proportional
Why is the Fed's control of the money supply imperfect?
The Fed doesn't control the amount households keep in deposits, and how much bankers choose to lend.
Equation for real interest rate?
Nominal interest rate - Inflation Rates
Equation for Nominal Interest Rate?
Real inflation rate + inflation
Who first studied the Fisher effect?
Irving Fisher
What is the maximum percentage of inflation that the Fed accepts in order to allow for money printing?
2.0%
What is 2011's level on inflation?
3.9%
In the 1979 inflation crisis, what was the FOMC's suggested policy to curb inflation?
Reduce money printing.
In the short term, reducing money printing can lead to what problems?
Interest rates for bank loans go up, meaning less people borrow money, which means less spending.