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30 Cards in this Set

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What are the 3 functions of money?
1) Medium of Exchange
2) Act as a Store of Value
3) Unit of Account
Store of Value?
Infinite Lifetime as Purchasing Power
- can be stored for future purchasing
Unit of Account?
A tool for measuring the relative worth of a wide variety of G+S+Resources
What are the six characteristics of Money?
1) Universal Acceptance
2) Scarce
3) Divisible
4) Portable
5) Unique
6) Durable
M1 = ?
Note: Money literally always readily available for use
1) Currency (coins, paper money) + (2) Checkable Deposits
M2 = ?
M1 +
1) Savings deposits
2) Money Market Deposit Accounts (MMDA's)
3) Small time deposits (<$100,000)
4) Money Market Mutual Funds (MMMF's)
M3 = ?
M2 + Large time deposits (>$100,000)
MMDA?
· Money Market Deposit Account
· Interest-Bearing Accounts that usually have a minimum balance requirement and limit on how often one withdraws from it
MMMF?
· Money Market Mutual Fund
· Interest-bearing Accounts, offered by investment companies who pool the total shareholder funds for their own short term securties.
Relationships:
1) Nominal GDP + Transaction Money Demanded
2) Transaction Money Demanded + Interest Rate
3) Asset Money Demanded + Interest Rate
1) Directly (Larger the Value of G+S, the more money demanded for exchanges)
2) Vertical Graph of Dt b/c does not depend on interest rate
3) Inversely b/c of the opportunity cost involved in holding M1 with no interest rather than in assets that give interest
Graphs (Money Demanded and Supplied in X-axis, Interest Rate in Y-axis):
1) Supply of Money
2) Demand of Money
1) Sm is a Vertical Grpah
2) Dm is a downsloping curve (like usual)
According to Congress, what two things are essential for an efficient banking system?
1) Centralization
2) Public Control
How many Board of Governors are there and how long are their individual terms?
·7
·~14 years, chosen by the President every two years
FOMC?
Federal Open Market Committee
Who makes up the FOMC?
·The Board of Governors
·The president of the New York Federal Reserve Bank
·Four of the remaining presidents of Federal Reserve Banks on a 1-year rotating basis
What does the FOMC do?
Direct the purchase and sale of bonds, bills, etc. in order to maintain or change key interest rates in the open market
What three characteristics are related to the 12 Federal Reserve Banks?
They are:
1) Central Banks (accomodated by economic diversity)
2) Quasi-Public Banks (owned by private commercial banks in area but sets basic rules that other banks must follow)
3) Bankers' Banks (Perform same functions for banks and thrifts that those banks do for the public)
What are seven functions of the Fed?
1) Issuing Currency
2) Setting Reserve Requirements and Holding Reserves
3) Lending Money to Banks and Thrifts (charges a 'discount rate' aka interest)
4) Providing for Check Collection (see notecard)
5) Acting as a fiscal agent (Provider of Financial Services by Government)
6) Supervising Banks
7) Controlling the money suplpy
Check Collection? (Provide example)
Sue gives check to Joe and takes the money from her Miami bank. Joe deposits in his Dallas bank. The Fed adjusts the reserves of the 2 banks to compensate.
What caused the decline of banks and thrifts between 1980 and 2002?
Hint: Mutual Fund companies included with 3 others
More saving away from banks and thrifts and toward other financial institutions with higher rates of return (as a result of bigger participation in international stocks)
Thrifts?
Savings and loan associations, mutual savings bank, credit union
Securities funds?
Stock brokerage firms
·Offer security advice and buy/sell stocks/bonds for clients
What 5 institutions can now merge with one another and sell each other's products?
1) Banks
2) Thrifts
3) Pension companies
4) Insurance companies
5) Securities firms
What are the 5 recent developments in banking?
1) Relative Decline in Banks/Thrifts
2) Consolidation in Banking Industry
3) Convergence of Services offered by those 5 institutions
4) Globalization of Banking
5) Widespread Emergence of Electronic Transactions
Formula for Multiplier?
m = (1/R)
Formula for Maximum DD Creation (FOR GIVEN COMMERCIAL BANKNG SYSTEM)
D = (Excess Reserves)(m)
Supply of Money in Economy = ?
Total Money Created within Banking System + Initial Deposit
What are 2 leakages of money that may dampen money-creating potential of banking system?
1) Currency Drains (Only part of loan is either used or redeemed)
2) Excess Reserves (More than required ratio requests is placed in. NO INTEREST ON ER)
In times of prosperity?
Banks lend as much as possible
In times of recession?
Increase Excess Reserves (Liquidity) and Withdraw as many loans as possible to prepare for Public Panic and Withdrawal