Money And Banking (Group 1)

Front 1

a system under which banks hold as reserves only a fraction of the funds that their customers have deposited.

Back 1

fractional reserve banking

Front 2

How do banks' actions "create money"?

Back 2

By lending money (moving funds from excess reserves to checkable deposits, thereby increasing M1)

Front 3

Name 3 things money is used as

Back 3

1) a means of payment 2) store of value 3) a standard of value (a unit of account) when people compare prices and thereby assess relative values

Front 4

something you can change into the generally acceptable medium of exchange quickly without taking a loss

Back 4

liquid asset

Front 5

True or False: M1 includes currency in circulation, checkable deposits, traveler's checks and demand deposits.

Back 5

True. Checkable deposits are another name for demand deposits.

Front 6

True or False: M1 includes currency in circulation, checkable deposits, money market accounts, traveler's checks, and demand deposits.

Back 6

False. Money market accounts are part of M2.

Front 7

__________ = non-interest bearing checking account

Back 7

demand deposit

Front 8

Until 1968, it was law that ___% of money had to be backed by gold.

Back 8

25%

Front 9

The monetary authority in most countries is called a ____________

Back 9

central bank

Front 10

Currency is manufactured by ____________ and ___________

Back 10

The Bureau of Engraving and Printing and the U.S. Mint

Front 11

Checking account deposits come into being when banks _________

Back 11

extend credit (make loans or buy securities)

Front 12

Checking deposits vanish when banks _______

Back 12

contract credit (when loans are repaid or banks sell securities)

Front 13

What's the leading use of funds by banks?

Back 13

lending (followed by purchase of Treasury securities)

Front 14

what is the money supply expansion multiplier equation?

Back 14

ΔDD = ΔR X (1/r{sub}dd)

Front 15

What are some reasons that the full value of the money supply expansion multiplier may not be realized?

Back 15

people cashing checks, banks holding on to reserves

Front 16

What are the 3 ways the Fed alters the money supply (M1)

Back 16

1) changing the required reserve ratio 2) open market operations 3) changing the discount rate

Front 17

What institution sets the upper and lower boundaries of reserve ratio limits?

Back 17

U.S. Congress

Front 18

What is the current reserve requirement for savings accounts? (percentage)

Back 18

0% (this is within the 0-9% limits set by congress)

Front 19

What is the current reserve requirement for checking accounts? (percentage)

Back 19

10% (this is within the 8-14% limits set by congress)

Front 20

True or False: The Fed does not create US Treasury securities

Back 20

True. The Treasury creates Treasury securities

Front 21

How are treasury securities created?

Back 21

When the Federal government authorizes spending in excess of revenue, the US Treasury issues T bills, notes, and bonds

Front 22

What is another name for the annual interest payment from a bond?

Back 22

"coupon"

Front 23

When the Fed buys T. securities from the secondary market, what effect does it have on the money supply?

Back 23

Money supply increases

Front 24

When the Fed sells T. securities from it's portfolio, what effect does it have on the money supply?

Back 24

Money supply decreases

Front 25

How do purchases of T. securities by the Fed from the secondary market increase money supply?

Back 25

The Fed purchases your securities, and hopes you will deposit your check into a bank, increasing excess reserves, prompting more lending.

Front 26

Where does the Fed get the money to buy T. securities from the secondary market?

Back 26

They create it out of thin air- as much as they want. Prudence is the only thing limiting them.

Front 27

Treasury bills, treasury notes, and treasury bonds are types of ___________ debt.

Back 27

marketable

Front 28

Which type of marketable debt matures in one year or less?

Back 28

Treasury bills

Front 29

Which type of marketable debt matures in two to ten years?

Back 29

Treasury notes

Front 30

Which type of marketable debt matures in 10+ years?

Back 30

Treasury bonds

Front 31

Why are U.S. Treasury securities considered to be the highest quality securities in the world?

Back 31

Because of the size, the strength, and the power of the U.S. economy. (Adams, 3)

Front 32

The Treasury has been going back and forth between two auction styles. What are they?

Back 32

Single price auction and Dutch auction.

Front 33

Explain a Dutch auction.

Back 33

In a Multiple Unit auction, the highest bidders all win, but they each pay the lowest winning price.

Front 34

One of the ways the Federal Reserve controls the supply of money and credit is to buy and sell U.S. government securities in the market. When the Fed is ready to buy or sell, they call the ___________

Back 34

primary dealers

Front 35

The Treasury auctions are handled by ___________

Back 35

The Federal Reserve Bank of New York

Front 36

Concerning regulation of the Treasury securities market, the ________ makes the rules, and the __________ enforces them.

Back 36

The U.S. Treasury makes the rules, and the Federal Reserve Bank of New York enforces them.

Front 37

What's another name for the discount rate offered to banks by the Fed?

Back 37

primary credit rate

Front 38

Who decides what the discount rate will be?

Back 38

Board of directors of the Federal Reserve

Front 39

Why is the discount window important?

Back 39

Because it's important to have an efficient way to get money from the hands of savers to the hands of investors (borrowers). Discount window also solves the problem of "runs on the bank" where too many customers withdraw their money.

Front 40

True or False: loaning money at the discount rate is the Fed's primary method of manipulating the money supply.

Back 40

False. The discount rate stabilizes the banks, but doesn't have much impact on the money supply.

Front 41

_________: process through which mortgage loans are bundled together, repackaged, & sold to investors as bonds

Back 41

mortgage securitization

Front 42

_________: a bond whose interest and principal payments to bond holders/owners are based on homebuyers making their monthly mortgage payments.

Back 42

mortgage-backed security (MBS)

Front 43

_________: a mortgage loan made to a borrower whose credit score is too low to qualify for a conventional mortgage.

Back 43

subprime mortgage