Economics Ch.28 And Ch.29

Front 1

Money

Back 1

Set of assets in an economy that people regularly use to buy goods from other people.

Front 2

Functions of Money

Back 2

1. Medium of Exchange

2. Unit of Account

3. Store of Value

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Medium of Exchange

Back 3

An item that buyers give to sellers when they want to purchase goods and services.

Front 4

Unit of Account

Back 4

The yardstick people use to post prices and record debts.

Front 5

Store of Value

Back 5

An item that people can use to transfer purchasing power from the present to the future.

Front 6

Liquidity

Back 6

Ease with which an asset can beconverted into the economy’s medium ofexchange

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Intrinsic Value

Back 7

Item would have value even if it wasn't used as money.

Front 8

Commodity Money

Back 8

Money that takes the form of a commodity with intrinsic value.

Front 9

Gold Standard

Back 9

Using gold as money—or paper easily convertible into gold.

Front 10

Fiat Money

Back 10

Money without intrinsic value that is used as money because of government decree.

Front 11

Currency

Back 11

The paper bills and coins in the hands of the public.

Front 12

Demand deposits

Back 12

Balances in bank accounts that depositors can access on demand by writing a check.

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What is in M1?

Back 13

1. Demand Deposits

2. Traveler's Checks

3. Other Checkable Deposits

4. Currency

Front 14

What's in M2?

Back 14

1. Savings Deposits

2. Small Time Deposits

3. Money Market Mutual Funds

4. A few minor categories.

5. Everything in M1

Front 15

How much currency in the economy, and how much does the average adult hold?

Back 15

Economy: 1.1 Trillion

Average Adult: $4,490

Front 16

What are the explanations for where most of the currency in the U.S. economy is?

Back 16

1. Abroad, 2. Held by drug dealers, tax evaders, and other criminals.

Front 17

Is currency a particularly good way to hold wealth?

Back 17

No, because it can be lost or stolen and doesn't have interest.

Front 18

The Federal Reserve

Back 18

The central bank of the United States.

Front 19

Central Bank

Back 19

An institution designed to oversee the banking system and regulate the quantity of money in the economy.

Front 20

The Federal Reserve was created in ____ after a series of ______ __________ in ______ convinced Congress that the United States needed a central bank to ensure the ________ of the nation's __________ __________.

Back 20

1913; Bank Failures; 1907; health; banking system;

Front 21

Board of Governors

Back 21

1. 7 Members

2. 14-year Terms

3. Appointed by President, approved by Senate.

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Chairman of Federal Reserve

Back 22

1. Directs Fed Staff

2. Presides over Board Meetings

3. Testifies about Fed policy in front of Congress

4. Appointed by President for 4-year term.

Front 23

The Federal Reserve System

Back 23

1. Federal Reserve Board in D.C.

2. 12 regional Federal Reserve Banks in major cities across the country, whose presidents are chosen by each bank's board of directors.

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The Fed's Jobs

Back 24

1. To regulate banks and ensure health of banking system.

2. Control the money supply.

Front 25

Money supply

Back 25

Quantity of money available in the economy.

Front 26

Monetary Policy

Back 26

Setting of the money supply by policymakers in the central bank.

Front 27

How does the Fed regulate banks and ensure the health of the banking system?

Back 27

1. By monitoring each bank's financial condition

2. Facilitates bank transactions — clearing checks

3. Acts as a bank's bank

4. Lender of last resort.

Front 28

How does the Fed control the money supply?

Back 28

With monetary policy, and the Federal Open Market Committee

Front 29

Federal Open Market Committee (FOMC)

Back 29

– 7 members of the board of governors

– 5 of the twelve regional bank presidents

• All twelve regional presidents attend eachFOMC meeting, but only five get to vote

– Meets about every 6 weeks inWashington, D.C.

– Discuss the condition of the economy

– Consider changes in monetary policy

Front 30

Fed's primary tool

Back 30

open-market operations

Front 31

How FOMC increases and decreases money supply.

Back 31

1. Increases: Open-market purchase

2. Decreases: Open-market sale

Front 32

Reserves

Back 32

Deposits that banks have received but haven't loaned out.

Front 33

What makes up money?

Back 33

Currency + Demand Deposits

Front 34

Fractional-reserve banking

Back 34

A banking system in which banks hold only a fraction of deposits as reserves.

Front 35

Reserve ratio

Back 35

The fraction of deposits that banks hold as reserves.

Front 36

Fractional Reserve Banking

Back 36

Banks hold only a fraction of deposits asreserves

Front 37

Reserve requirement

Back 37

Minimum amount of reserves that banksmust hold; set by the Fed

Front 38

Excess Reserve

Back 38

Reserves held above legal minimum.

Front 39

When the bank holds only a fraction of deposits in reserve...

Back 39

1. Banks create money,

2. Increase the money supply, but

3. Do not create wealth.

Front 40

The money multiplier

Back 40

– Amount of money the banking systemgenerates with each dollar of reserves

– Reciprocal of the reserve ratio = 1 / Reserve Ratio

Front 41

Bank capital

Back 41

The resources a bank's owners have put into the institution.

Front 42

Capital requirement

Back 42

A government regulation specifying a minimum amount of bank capital to ensure banks will be able to pay off their depositors.

Front 43

Two groups of monetary tools:

Back 43

1. How the Fed influences quantity of reserves

2. How the Fed influences the reserve ratio and thereby the money multiplier.

Front 44

Open-market operations

Back 44

The purchase and sale of U.S. Government bonds by the Fed.

Front 45

How the Fed influences the quantity of reserves:

Back 45

1. Open-market operations

2. Fed lending to banks

Front 46

How the Fed influences the reserve ratio and thereby the money multiplier:

Back 46

1. Reserve requirements

2. Paying interest on reserves

Front 47

What tool of influencing quantity of reserves is easiest to conduct, and used most often?

Back 47

Open-market operations.

Front 48

The Fed buys U.S. Government bonds to ______ money supply.

Back 48

Increase

Front 49

The Fed sells U.S. Government bonds to _____ money supply.

Back 49

Decrease

Front 50

Discount Rate

Back 50

The interest rate on the loans that the Fed makes to banks.

Front 51

Describe how and why the Fed lends to banks.

Back 51

Why: To increase the money supply.

How: By using the discount window, or a Term Auction Facility

Front 52

Discount Window

Back 52

Instrument of monetary policy which allows banks to borrow money from the Fed on a short-term basis to meet temporary shortages of liquidity.

Front 53

Term Auction Facility

Back 53

Banks bid to borrow funds that Fed wants to lend to banks. These loans go to the banks willing to bid the highest interest rates and have acceptable collateral.

Front 54

A higher discount rate _______ the money supply, and a lower discount rate ________ the money supply.

Back 54

Reduces, Increases.

Front 55

Reserve requirements

Back 55

1. Regulations on the minimum amount of reserves that banks must hold against deposits.

2. Used rarely—disrupt business of banking

3. Less effective in recent years; many banks hold excess reserves.

Front 56

Since October 2008, the Fed began...

Back 56

Paying banks interest on whatever that bank held in reserves.

Front 57

An increase in the interest rate on reserves will...

Back 57

Increase the reserve ratio, lower the money multiplier, and lower the money supply.

Front 58

Why isn't policies controlling the money supply precise?

Back 58

1. Because the Fed doesn't control the amount of money that households choose to hold as deposits in banks, or

2. The amount bankers choose to lend.

Front 59

Bank Runs

Back 59

1. Depositors suspect that a bank might go bankrupt, so they "run" to the bank to withdraw their deposits.

2. Because of fractional reserve banking, banks can't satisfy withdrawal requests from all depositors.

Front 60

When a bank run occurs...

Back 60

Bank is forced to close its doors until

1. Some bank loans are repaid,

2. Some lender of last resort provides it with money to satisfy depositors.

—It complicates control of money supply.

Front 61

With the Great Depression, there was...

Back 61

1. A wave of bank runs and bank closings, as

2. Households withdrew their deposits from banks.

3. As a result, households and bankers became more cautious.

Front 62

Bankers responded to falling reserves in Great Depression by:

Back 62

• Reducing bank loans,

• Increased their reserve ratios

• Smaller money multiplier

• Decrease in money supply

Front 63

Are bank runs a major problem in the U.S. banking system today?

Back 63

No, because depositors are confident, and FDIC.

Front 64

Federal Funds Rate

Back 64

The interest rate at which banks make overnight loans to one another — Price of the Loan

Front 65

How is the federal funds rate different from the discount rate?

Back 65

Discount rate is to borrow from the Fed, federal funds rate is to borrow from other banks.

Front 66

T/F: Federal funds rate and discount rate move closely together in practice.

Back 66

True

Front 67

What are the economic impacts of the Federal Funds Rate?

Back 67

Other interest rates often move in the same direction as the FFR.

Front 68

Through the FOMC, the Federal Reserve has the power to increase or decrease the...

Back 68

Number of dollars in the economy.

Front 69

Which group is chiefly responsible for seeing that the Fed meets its bank regulation and banking system health goal?

Back 69

The regional federal reserve banks.

Front 70

The Fed's policies have an important effect on...

Back 70

Inflation in the long run and employment and production in the short run.

Front 71

Who is employed?

Back 71

1. Paid employees

2. Business Owners

3. Unpaid workers in a family member's business

4. Full-time and part-time workers

5. Temporarily absent workers—those on vacation, for example.

Front 72

Who is unemployed?

Back 72

Anyone without a job who is...

1. Available for work

2. Has tried to find employment during the previous four weeks

3. Laid off

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Who isn't in the labor force?

Back 73

1. Anyone who was not employed,

2. Full-time students

3. Homemakers

4. Retirees

Front 74

Labor force

Back 74

Total number of workers, including both the employed and the unemployed.

Front 75

Labor force formula:

Back 75

number of employed + number of unemployed

Front 76

Unemployment Rate

Back 76

Percentage of the labor force that is unemployed.

Front 77

Unemployment rate formula =

Back 77

Number of employed

—————————— x 100

Labor Force

Front 78

Labor-Force Participation Rate

Back 78

The percentage of the adult population that is in the labor force.

Front 79

Labor-Force Participation Rate Formula

Back 79

Labor Force

——————— x 100

Adult Population

Front 80

Cyclical Unemployment

Back 80

Deviation of the unemployment from its natural rate.