Econ Exam 2 Chapter 11 – Flashcards
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Bank runs are a problem because...
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banks only hold a fraction of deposits as reserves
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If traveler's checks were $1000 dollars higher and savings deposits were $500 dollars higher, M1 would...
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be 1,000 higher and M2 would be 1500 higher
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M1 includes...
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currency, demand deposits, and traveler's checks
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During recessions, banks typically choose to hold more excess reserves relative to their deposits. This action...
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decreases the money multiplier and decreases the money supply.
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The Fed can reduce the federal funds rate by...
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increasing the money supply. to increase the money supply it could buy bonds
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Currency includes...
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paper bills and coins
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The most common method employed by the Fed to increase the money supply is the...
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purchase of U.S. government bonds
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Money is...
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the most liquid asset but an imperfect store of value
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The Fed purchases $200 worth of government bonds from the public. The reserve requirement is 12.5 percent, people hold no currency, and the banking system keeps no excess reserves. The U.S. money supply eventually increases by...
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1,600
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Money is...
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more efficient than barter, makes trade easier, and allows greater specialization
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If the central bank in some country raised the reserve requirement, then the money multiplier for that country...
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would decrease
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When colonists in Virginia used tobacco as money, they were using...
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commodity money
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If the federal funds rate were above the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by...
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buying bonds. This buying would increase reserves.
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the existence of money...
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makes trade easier
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The discount rate is...
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the rate at which the Fed lends to banks.
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As the reserve ratio decreases, the money multiplier...
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increases
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Savings deposits are included in...
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M2 but NOT M1
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When conducting an open-market sale, the Fed...
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sells government bonds, and in so doing decreases the money supply.
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If the Federal Reserve increases the interest rate on bank deposits at the Fed, banks will want to hold...
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more reserves, so the money multiplier will fall
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If a bank uses $200 of excess reserves to make a new loan when the reserve ratio is 15 percent, this action by itself initially makes the money supply...
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increase by 200 dollars while wealth does not change
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If the Federal Open Market Committee decides to decrease the money supply, it will...
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sell gov bonds
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You receive money as payment for babysitting your neighbors' children. This best illustrates which function of money?
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medium of exchange
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If the reserve ratio is 20 percent, then $100 of new reserves can generate..
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$500 of new money in the economy
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If the reserve ratio is 100-percent, then a new deposit of $1000 into a bank account...
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leaves the size of the money supply unchanged
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At one time, people in a certain country had no access to banks; they relied exclusively on currency. Then, a fractional-reserve banking system was created. As a result, the money supply....
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increased. The central bank could have reduced the size of this increase by selling bonds.
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If people decide to hold more currency relative to deposits, the money supply...
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falls. The larger the reserve ratio is, the less the money supply falls.
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Fiat money...
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has no intrinsic value
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Suppose banks desire to hold no excess reserves and that the Fed has set a reserve requirement of 6 percent. If you deposit $8,000 into First Raven Bank,
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First Raven's assets and liabilities both will increase by $8,000, required reserves increase by $480, and they will be able to lend out $7,520.
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Mia puts money into a piggy bank so she can spend it later. What function of money does this illustrate?
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store of value
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If the Fed sells government bonds to the public, then reserves...
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decrease and the money supply decreases.
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Suppose banks decide to hold more excess reserves relative to deposits. Other things the same, this action will cause the money supply...
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to fall. To reduce the impact of this the Fed could buy Treasury bonds
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credit cards...
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are not considered money
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commodity money is money with...
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intrinsic value
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An open market purchase...
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increases the number of dollars in the hands of the public and decreases the number of bonds in the hands of the public.
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In December 1999 people feared that there might be computer problems at banks as the century changed. Consequently, people wanted to hold relatively more in currency and relatively less in deposits. In anticipation banks raised their reserve ratios to have enough cash on hand to meet depositors' demands. These actions by the public...
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would reduce the multiplier. If the Fed wanted to offset the effect of this on the size of the money supply, it could have bought bonds.
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economists use the word money to describe...
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assets regularly used to buy goods and services
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A central bank is...
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an institution designed to oversee the banking system and regulate the quantity of money in the economy
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An important function of the U.S. Federal Reserve is to..
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control the supply of money
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The Federal Deposit Insurance Corporation...
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protects depositors in the event of bank failures.
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The Fed can directly protect a bank during a bank run by...
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lending reserves to the bank
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The federal funds rate is the interest rate that...
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banks charge one another for loans.
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A problem that the Fed faces when it attempts to control the money supply is that..
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since the U.S. has a fractional-reserve banking system, the amount of money in the economy depends in part on the behavior of depositors and bankers.
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when a bank loans out 1,000 dollars, the money supply...
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increases
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If the money multiplier is 3 and the Fed buys $50,000 worth of bonds, what happens to the money supply?
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it increases by $150,000
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Reserve requirements are regulations concerning...
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the amount of reserves banks must hold against deposits.
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money is a...
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medium of exchange, store of value and unit of account
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medium of exchange
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an item that buyers give to sellers when they purchase goods and services
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unit of account
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the yardstick people use to post prices and record debts
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store of value
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an item that people can use to transfer purchasing power from the present to the future (wealth)
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liquidity
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the ease with which an asset can be converted into the economy's medium of exchange
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money stock
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the quantity of money circulating in the economy
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currency
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paper bills and coins in the hands of the public
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demand deposits
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balances in bank accounts that depositors can access on demand by writing a check or swiping a card
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Who holds all the money?
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money held abroad, drug dealers, tax evaders, other criminals
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Federal Reserve (Fed)
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central bank of the U.S.
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Fed was created in...
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1913
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Fed is run by...
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a board of governors. 7 members, most important is the chairman
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The Fed chairman...
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directs staff, presides over meetings, testifies about policy. Serves 4 year terms, appointed by the president
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the Chairman appointed in 2005 and 2009
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Ben Bernanke
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2 jobs of the Fed:
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regulate banks and ensure health of banking system
control quantity of money that is made available in the economy
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monetary policy
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the setting of the money supply by policymakers in the central bank
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FOMC
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federal open market committee, meet every 6 weeks in D.C. Made up of 7 members of the board of governors and 5/12 of the regional bank presidents
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Open-market sale of bonds by the Fed...
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decreases money supply
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Reserves...
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deposits that banks have received but have not loaned out
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Fractional reserve banking
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A banking system in which banks hold only a fraction of deposits as reserves
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Reserve ratio
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the fraction of deposits that banks hold as reserves
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When banks hold only a fraction of deposits in reserve...
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the banking system creates money
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Money multiplier
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the amount of money the banking system generates with each dollar of reserve. the reciprocal of the reserve ratio
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The higher the reserve ratio...
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the less of each deposit banks loan out and the smaller the money multiplier
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Bank capital
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the resources that a banks owners have put into the institution
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Leverage
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The use of borrowed money to supplement existing funds for purposes of investment
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Leverage ratio
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the ratio of assets to bank capital
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Capital requirement
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a government regulation specifying a minimum amount of bank capital
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credit crunch
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shortage of capital
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open market operations
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the purchase and sale of U.S. government bonds by the Fed
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Discount rate
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the interest rate on the loans that the Fed makes to banks
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Reserve requirements
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regulations on the minimum amount of reserves that banks must hold against deposits
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When did the Fed begin paying "interest on reserves"
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October 08
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The Fed does not...
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control the amount of money that households choose to hold as deposits in banks. They also don't control the amount that bankers choose to lend
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Bank run
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occurs when depositors suspect that a bank may go bankrupt and they run to withdraw their deposits
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from 1929-1933, the money supply...
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decreased by 28%
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FDIC
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federal deposit insurance corporation that guarantees safety of deposits
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Federal funds rate
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the interest rate at which banks make overnight loans to one another
