Chapter 13 Macroeconomics

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d: money

Back 1

an asset that is widely accepted as a means of payment in the economy

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d: asset

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something of value thats owned by someone

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examples of assets

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stocks, bonds, real estate, paintings, cars

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why is money different than other assets

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its a means of payment

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d: means of payment

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anything acceptable as payment for goods and services

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3 examples of money

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coins/paper currency
traveler's checks
funds held in checking accounts

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why isnt a credit card considered a type of money

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Credit cards aren’t a type of money, because using your credit card is like an instant loan and you owe that amount to the bank

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why arent stocks/bonds and gold bars types of money

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Stocks, bonds, and gold aren’t money because you cant use them to buy things

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Cash in the hands of the public

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total dollar value of all the coins and currency in circulation (largest)

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Checkable deposits

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accounts held by households and business firms at commercial banks (2nd largest)

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Demand deposits

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most basic checking accounts, because when you write a check to someone on one of these accounts, the person can go into your bank and on demand be paid in cash, pay no interest (type of checkable deposit)

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Automatic transfers from savings accounts

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interest paying savings accounts that automatically transfer funds into demand deposit accounts as you write checks (type of checkable deposit)

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Traveler’s checks

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specially printed checks that you can buy from banks or other private companies such as American Express (smallest section)

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what are the two types of checkable deposits

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demand deposits
automatic transfers from savings accounts

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what is the money supply formula

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money supply = cash in the hands of the public + checking account deposits + traveler's checks

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smallest to largest components of the money supply

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traveler's checks
checkable deposits
cash in hands of public

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M1

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cash
checkable deposits
traveler’s checks
-the most common measure of money

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M2

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all the components of M1 + savings deposits, money market deposits
money market funds
certificates of deposit under $100,000
-much larger than M1

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Savings deposits

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funds can be very easily transferred into checking accounts

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Money market deposits

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work like checking accounts but have some restrictions

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Money market funds

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take investors funds and lend them out for short periods

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do economists look at m1 or m2 more

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5. When looking at the money supply, economists mostly look at M2 since it includes all types of accounts and the cash is more evenly distributed

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three functions of money

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means of payment
store of value
unit of account

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why is money important as a means of payment

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increases the efficiency of trading compared to bartering

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difference between store of value and unit of account

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store of value is the way we think ab money
unit of account is the actual money units

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d: store of value

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a form in which wealth can be held
People have confidence they can use money as a means of payment

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d: Unit of account

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common unit for measuring how much something is worth
Allows us to compare the costs of different goods/services

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what was the money situation like pre-1790

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Prior to 1790 each colony had its own currency named the pound but each had a different purchasing power

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when was the dollar born

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1790ish
the constitution allowed congress to start a new currency called the dollar

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when did private banks stop printing their own money

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the civil war

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what was the first federal paper currency

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greenback
(unit of account and means of payment)

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when did private banks begin to make their own money again after the civil war

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1879

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when was the fed created

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1913

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d: federal Reserve System

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created in 1913, monetary authority of the US charged with creating and regulating the nation’s supply of money

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d: Commodity money

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precious metals and other valuable commodities such as furs and jewels

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what was paper currency originally

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Paper currency was just a certificate representing a certain amount of gold or silver held by a bank
Currency could be exchanged for a valuable commodity
Issuer could print new money only when it acquired additional gold or silver

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d: Fiat money

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something that serves as means of payment by the government

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d: Financial intermediaries

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business firms that specialize in assembling loanable funds from households and firms whose revenues exceed their expenditures and channeling those funds to households and firms whose expenditures exceed revenues

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how are financial intermediaries beneficial to the economy

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combine a large number of lenders funds to a borrower
help minimize risk

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d: depository institutions

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financial intermediary that accepts deposits from the general public and lends the deposits to borrowers

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d: commercial banks

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largest group of depository institutions, obtain funds by accepting checkable deposits, savings deposits, and time deposits and uses the funds to loan out

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d: Balance sheet

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two column list that provides information about the financial condition of a bank at a particular point in time

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d: Assets

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everything of value the bank owns (left)

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d: Liabilities

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amount that the bank owes (right)

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List of Assets

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bonds
loans
property and buildings
cash in vault
accounts held at fed

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d: Bonds

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promise to pay funds to the holder of the bond, issued by corp or a gov agency when it borrows money (pay back loan either gradually or all at once in the future), generate interest for the bank for income

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d: Loans

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promises signed by households or noncorporate businesses to pay back funds (auto loans, student loans, home mortgages), generate interest for the bank for income

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d: Reserves

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vault cash + balances held at Fed

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d: Required reserves

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the minimum amount of reserves a bank must hold depending on the amount of its deposit liabilities

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d: Required reserve ratio

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set by the Fed tells banks the fraction of their checking accounts that they must hold as required reserves

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d: Excess reserves

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reserves in excess of required reserves, banks do this to have flexibility to increase loans in the future in case interest rates rise, and during recessions might be useful incase people declare bankruptcy and are unable to pay loans

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why will a bank hold funds at fed

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iA bank will hold funds at the Fed because some of the banks customers might want to withdraw more cash than other customers are depositing to facilitate their transactions with other banks
required

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why do banks have excess reserves

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banks do this to have flexibility to increase loans in the future in case interest rates rise, and during recessions might be useful incase people declare bankruptcy and are unable to pay loans

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list of liabilities

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checking account deposits
other deposits
bank borrowing
shareholder's equity

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why haven't there been bank panics after 1933

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1) the fed learned from the depression, and is ready to inject reserves into the system more quickly in a crisis
2) in 1933 congress created the Federal Deposit Insurance Corporation

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why were there bank failures in the 80s and 90s

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occurred in state chartered banks
the banks are less closely regulated by the Fed and not ensured by the FDIC
psych of panic panic took ahold

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Bank’s Liabilities

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checking account deposits
shareholder's equity
other deposits (CDs)
savings accounts
bank borrowing

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d: Other deposits

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funds that households and firms hold at the bank in some other form than checking accounts (savings accounts or certificiates of deposit (CDs)

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d: Bank borrowing

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when a bank borrows from another bank or issuing their own bonds

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equation for stockholder's equity

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total assets- total liabilities

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d: central bank

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nation’s principal monetary authority responsible for controlling the money supply

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what yr was the fed established

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1913

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how many fed reserve districts

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12

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what is the structure of the Board of Governors of the Fed

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7 members who are appointed by the president and confirmed by the senate for a 14 year term

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how long is the term of the chairman of the board of governors

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4 yrs not concurrent w presidents

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structure of the board of directors for fed reserve banks

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own board of 9 directors, 3 of whom are appointed by the Board of Governors
rest are appointed by private commercial banks

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d: member Banks

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1/3 of the commercial banks in the US are members of the Fed system

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d: state banks

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banks charted by state

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d: national banks

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banks charted by the government

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d: The Federal Open Market Committee

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committee of Fed officials that establishes US monetary policy
consists of all 7 governors and 5 of the 12 district bank presidents
meets 8 times a year to discuss current trends in the economy
super private

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structure of the FOMC

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consists of all 7 governors and 5 of the 12 district bank presidents

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what are the functions of the fed

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supervising and Regulating Bank
acting as a Bank for Banks
issuing Paper Currency
check Clearing
guiding the Macroeconomy

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how does the fed function by: supervising and Regulating Banks

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Sets an enforces reserve requirements
Major regulatory agency that oversees banks
Sets standards for establishing new banks
Determines what sorts of loans/investments banks can make
Closely monitors banks financial activities

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how does the fed function by:
acting as a Bank for Banks

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Commercial banks use the fed in the same way that ordinary citizens use commercial banks
Banks can borrow from the fed at the special discount rate
Discount rate- the interest rate the Fed charges on loan to banks

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how does the fed function by:
issuing Paper Currency

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Once paper money is printed is shipped to the Fed
The fed puts currency into circulation

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how does the fed function by:
check Clearing

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transferring the value of checks from one bank to another
Besides clearinghouses, the Fed mostly does this

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how does the fed function by:
guiding the Macroeconomy

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Plays the lead role in guiding the macroeconomy
Uses tools to attempt to keep the economy as close to potential output as possible

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how does the fed function by:
dealing with Financial Crises

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In times of crisis the bank goes into overdrive
Acts as lender of last resort
Lender of last resort- when the Fed makes sure that banks have enough serves to meet their obligations to depositors

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d: discount rate

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the interest rate the Fed charges on loan to banks

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d: check Clearing

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transferring the value of checks from one bank to another

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d: Monetary policy

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when the Fed guides the macroeconomy and deals with financial crises, most commonly used policy is the ability to influence interest rates (changes the money supply)

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d: Open market purchase

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purchases of bonds by the Fed
increases the money supply
increases interest rate

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d: open market sales

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the Fed buys bonds
decreases money supply
decreases interest rate

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d: open market operations

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the sale/purchase of bonds by the Fed

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money multiplier formula

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Δmoney supply = 1/RRR * reserve injection

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why is the multiplier process not an accurate predictor of the amount of money loaned

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1) everyone doesnt put all their money in the bank
2) banks might have excess reserves

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ways the fed can change MS

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purchase bonds
decrease/increase discount rate
decrease/increase RRR

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the higher the RRR

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lower the money supply

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the lower the RRR

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higher the money supply

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when you decrease the RRR banks will

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banks will loan out more money

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when you increase the RRR banks will

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loan out less

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why wont banks borrow from the fed

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Banks don’t like borrowing from the fed because potential investors might see this as a sign of weakness
3. Because of this hesitancy changes in the discount rate typically have little effect on bank borrowing. Reserves or money supply

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d: Insolvent

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a bank is insolvent when total assets are less than total liabilities (when shareholder equity is negative)

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a bank is insolvent when

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shareholder equity is negative

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a banking failure is when

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an insolvent bank goes out of business

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a bank becomes insolvent because

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of bankruptcies of businesses and households that have borrowed money from the bank (when the loans aren’t paid back the loans must be written off or subtracted from the loans, shareholders equity changes too)

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d: run on the bank

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an attempt by many of the bank’s depositors to withdraw their funds

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d: banking panic

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a situation in which fearful depositors attempt to withdraw funds from many banks simultaneously

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d: Federal Deposit Insurance Corporation

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in 1933, reimburses those who lose their deposits, reimburse up to 250,000
super important because people won’t react to rumors since they know they will be covered

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what is the key way banks are regulated

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through continuous monitoring of their financial condition through the shareholder’s equity entry

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d: bank capital

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another name for shareholder’s equity

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d: capital requirements

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banks must hold a significant percentage of their assets as bank capital, encourages them to lend responsibly