Money, Banking, and Financial Institutions Chapter 14

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medium of exchange
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any item sellers generally accept and buyers generally use to pay for good or service; money; a convenient means of exchanging goods and services without engaging in barter
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unit of account
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a standard unit in which prices can be stated and the value of goods and services can be compared; one of the 3 functions of money
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store of value
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an asset set aside for future use; one of the three functions of money
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liquidity
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the ease with which an asset can be converted quickly into cash with little or no loss of purchasing power. money is said to be perfectly liquid, whereas other assets have a lesser degree of liquidity
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M1
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the most narrowly defined money supply, equal to currency in the hands of the public and the checkable deposits of commercial banks and thrift institutions
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Federal Reserve Notes
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paper money issued by the Federal Reserve Banks
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token money
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bills or coins for which the amount printed on the currency bears no relationship to the value of the paper or metal embodied within it; for currency still circulating, money for which the face value exceeds the commodity value.
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checkable deposits
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any deposit in a commercial bank or thrift institution against which a a check may be written
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commercial banks
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a firm that engages in the business of banking (accepting deposits, offers checking accounts, and makes loans
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thrift institutions
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a savings and loan association, mutual savings bank or credit unions
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near-monies
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financial assets, the most important of which are non checkable savings accounts, time deposits, and U.S. short-term securities and savings bonds, which are not a medium of exchange but can be readily converted into money
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M2
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A more broadly defined money supply, equal to M1 plus non checkable savings accounts (including money market deposit accounts), small time deposits (deposits less of $100,000) and individual money market mutual fund balances.
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savings account
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a deposit in a commercial bank or thrift institution on which interest payments are received; generally used for saving rather than daily transactional a component of the M2 money supply
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money market deposit account
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banks and thrift-provided interest-bearing accounts that contain a variety of short-term securities; such accounts have minimum balance requirements and limits on the frequency of withdrawals
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time deposits
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a interest-earning deposit in a commercial bank or thrift institution that the depositor can withdraw without penalty after the end of a specified period
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money market mutual fund
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interest-bearing accounts offered by investment companies, which pool depositors' funds for the purchase of short-term securities; depositors can write checks in minimum amounts or more against their accounts
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legal tender
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a nation's official currency (bills and coins). Payment of debts must be accepted in this monetary unit, but creditors can specify the form of payment, for example \"cash only\"
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Federal Reserve System
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the U.S. central bank, consisting of the Board of Governors of the Federal Reserve and the 12 Federal Reserve Banks, which controls the lending activity of the nation's banks and thrifts and thus the money supply
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Board of Governors
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the seven member group that supervises and controls the money and banking system of the U.S.; the Board of Governors of the Federal Reserve System; the Federal Reserve board
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Federal Reserve Banks
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the 12 banks chartered by the U.S. government to control the money supply and perform other functions
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Federal Open Market Committe
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the 12 member group that determines the purchase and sale policies of the Federal Reserve Banks in the market for U.S. government securities
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subprime mortgage loans
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high-interest rate loans to home buyers with above-average credit risk
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mortgage-backed securities
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bonds that represent claims to all or part of the monthly mortgage payments from from the pools of mortgage loans made by lenders to borrowers to help them purchase residential property.
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securitization
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the process of aggregating many individual financial debts, such as mortgages or student loans, into a pool and then issuing new securities (financial instruments) backed by the pool. the holders of the new securities are entitled to receive the debt payments made on the individual financial debts in pool
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Troubled Asset Relief Program
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A 2008 Federal government program that authorized the U.S. Treasury to loan up to $700 billion to critical financial institutions and other U.S. firms that were in extreme financial trouble and therefore at high risk of failure
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financial services industry
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the broad category of firms that provide financial products and services to help households and businesses earn interest, receive dividends, obtain capital gains, insure against losses, and plan for retirement; includes commercial banks, thrifts, insurance companies, mutual fund companies, pension funds, investment banks, and securities firms.
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Wall Street Reform and Consumer Protection Act
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a law that gave authority to the Federal Reserve System to regulate all large financial institutions, created an oversight council to look for growing risk to the financial system, establish a process for the Federal government to sell off the assets of large failing financial institutions, provided Federal regulatory oversight of asset-backed securities, and created a financial consumer protection bureau within the Fed
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moral hazard
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the tendency for financial investors and financial services firms to take on greater risks because they assume they are at least partially insured against losses.
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What can be used as a form of money?
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anything that is accepted as a) a medium of exchange b) a unit of monetary account c) a store of value can be used as money
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What does money represent?
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money represents the debts of government and institutions offering checkable deposits (commercial banks and thrift institutions) and has value because of the goods, services, and resources it will command in the market.
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What does the U.S. banking system consist of?
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a) the Board of Governors b) the 12 Federal Reserve Banks c) some 6,800 commercial banks and 8,700 thrift institutions (mainly credit unions)
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What are the major functions of the Fed?
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a) issue Federal Reserve Notes b) set reserve requirements and hold reserves deposited by banks and thrifts c) lend money to financial institutions and serve as the lender of last resort in national financial emergencies d) provide for the rapid collection of checks e) act as the fiscal agent for the Federal gov f) supervise the operations of the banks g) regulate the supply of money in the best interests of the economy
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What intensifies the moral hazard problem?
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the TARP loans and the Fed's lender of last resort actions
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quasi-public banks
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the 12 federal reserve banks, which blend private ownership and public control
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bankers' banks
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the federal reserve banks
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Primary Dealer Credit Facility
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provides overnight loans to primary dealers who are willing to post loan-backed securities as collateral
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Term Securities Lending Facility
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lends U.S. securities to primary dealers for one-month terms to promote liquidity in the markets for these U.S. securities
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Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility
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provides loans to U.S. banks and thrifts to finance their purchases of commercial paper from money market mutual funds
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Commercial Funding Facility
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purchases commercial paper to support the commercial paper market and therefore the short-term credit needs of businesses
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Money Market Investor Funding Facility
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provides funding support to a private-sector initiative designed to ensure the liquidity of U.S. money market mutual funds
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Term Asset-Backed Securities Loan Facility
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helps households and business with their credit needs by providing funding support or asset-backed securities collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration
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Interest Payments on Reserves
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bolsters the profitability of banks by paying interest on the reserves they hold in their vaults or in the Federal Reserve Banks
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What percent of private banks are charted by the Federal government to operate nationally?
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25%
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True or False: The Federal Reserve can make available a particular quantity of money and can change that amount through the policy tools.
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True
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Federal Reserve Banks are not motivated by _____ like private firms
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profit
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True or False: Society can attain a higher degree of specialization without the use of money than it can with money.
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False
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___ enables society to gain the advantages of geographic and human specialization
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Money
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The role of the US President with the confirmation of the Senate, is to appoint ____ Board of Governors members
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7
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What are the benefits of the long-term appointments of Board members?
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-Experienced membership -Independence from political pressures that could result in inflation -Continuity
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Like banks, what is required to keep a certain percentage of their checkable deposits as \"reserve\"?
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Thrift institutions
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One-fourth of commercial banks that are charted by the Federal government are called:
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national banks
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What describes a time deposit?
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- Financial institutions pay higher interest rates on time deposits than on MMDAs - A person will be severely penalized for withdrawing a time deposit prior to the withdrawal limitation date - A person can convert a 6-month time deposit to currency without penalty 6 months or more after it has been deposited
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The central banks accept as ____ from the banks and thrifts any portion of their mandated reserves not held as vault cash.
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deposits
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Prior to the centralization and public control of US banks, who was charged with creating and implementing nationally consistent banking policies?
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No single entry
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The 12 Federal Reserve Banks implement the basic policy decisions of:
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The board of Govenors
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Money enables society to gain which of the following advantage?
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Human specialization Geographic specilization
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M2 only includes the MMMF accounts held by ___, not those held by businesses and other institutions.
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individuals
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True or False: M1 is a narrow definition of the money supply and M2 is a broader definition that includes M1 along with several other relatively liquid account balances.
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True
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Money market mutual fund companies use the combined funds of individual ___ to buy interest-bearing short-term credit instruments such as certificates of deposit and US government securities
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shareholders
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M2 equals M1 plus
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saving deposits, including MMDAs, plus small (less than $100,000) time deposits plus MMMFs held by individuals
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Cash is perfectly ___ while stocks, bonds, and real estate are less ____ than case
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liquid; liquid
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A bakery worker receives money for labor rather than 200 bagels. This is an example of money as a medium of ___.
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exchange
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When money is usable for buying and selling goods and services, it functions as a:
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medium of exchange
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Holding money is a relatively risk-free way to store wealth when ___ is nonexistent or mild.
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inflation
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What provides checkable deposits?
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Commercial Banks Savings institutions
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Who influences the interest rate by making an amount of money available that is consistent with high and rising levels of output and employment and a relatively constant price level?
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The Federal Reserve Bank
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If Megan writes a check on her San Francisco bank to Aaron, who deposits it in his Cleveland bank, how does the Cleveland bank collect the money represented by the check drawn against the San Fran bank?
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Using the Federal Reserve Banks
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On the day after the September 11, 2001 attacks, the ____ lent 45 billion to U.S. banks and thrifts as the \"lender of last resort\".
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Federal Reserve Bank
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Just as banks and thrifts accept the deposits of an make loans to the public, the ___ accepts the deposits of and makes loans to banks and thrifts.
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central bank
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Money supply, M1 equals ____ plus checkable deposits.
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currency
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Why are checkable deposits of the US Treasury or the Federal Reserve that are held by commercial banks or thrifts excluded from the money supply?
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To enable a better assessment of the amount of money available to the private sector for potential spending
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___ aids rational decision making by enabling buyers and sellers to easily compare the prices of various goods, services, and resources.
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Money
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The fact that money cab be available to use at a future date explains which function of money?
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Store of value
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___ is a \"stock\" of some item or group of items
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money
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Governments make sure that the face values of token money exceed the ___ values of currency in order to discourage people from destroying coins and bills to resell the material that they are made of.
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intrinsic
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A ___ crisis in 1907 pushed the US Congree to appoint a Commission whose report eventually led to the Federal Reserve Act of 1913.
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banking
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How many Federal Reserve banks are there in the United States?
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Twelve
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When money is used as a yardstick for measuring the relative worth of goods or services it is functions as a:
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unit of account
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People store some of their wealth as ___ in order to buy things later.
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money
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What comprises the currency of the United States?
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Metal Coins Paper Money
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The central authority of the US money and banking system is the _____ of ____ of the Federal Reserve System
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Board; Governors
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Why do governments make sure that the face values of currency exceed the intrinsic values of currency?
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To discourage people from destroying currency to resell the material it's made of
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Political pressure on Congress and the executive branch may result in inflationary fiscal policies, including what?
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Tax cuts Special-interest spending
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What did Congress decided was essential for an efficient banking system?
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Public control Centralization
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Who sets reserve requirements, which are the fractions of checking account balances that banks must maintain as currency reserves?
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The Fed
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The Fed acts as the ___ agent (provider of financial services) for the Federal government.
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fiscal
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The Federal Reserve Banks deal with
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Thrifts Commercial banks Government
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Congress purposely established the Federal Reserve Banks as a(n) ___ agency of government
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independent
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What is the interest rate charged on loans from the Fed to banks and thrifts in their district?
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Discount rate
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What are the functions that the Federal Reserve Banks perform?
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- Setting reserve requirements and holding reserves - Lending money - Providing for check collection - Issuing currency
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Lobbying groups and citizens would pressure elected officials to keep interest rates low even though at times high interest rates are necessary to reduce AD and thus control inflation, if who controlled the nation's monetary policy?
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Congress and the executive branch
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___ banks are private banks charted by the individual states to operate within those states.
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State
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True or False: Each Federal Reserve Bank is owned by the federally-charted banks in its district.
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True
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____ institutions are regulated by agencies in addition to the Board of Governors and the Federal Reserve Banks
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Thrift
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What are the reasons that the Fed makes periodic examinations of banks?
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-To ascertain that banks perform in accordance with regulations -To assess bank profitability -To uncover questionable practices
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If Congress and the executive branch also controlled the nation's monetary policy, citizens and lobbying groups would pressure elected officials to keep the interest rates low, even though at times high interest rates are necessary to reduce AD and thus control ____.
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inflation
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When people measure the worth of various items in terms of money, money is performing the function of a what?
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unit of account
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The Federal Reserve Banks are \"bankers' banks\" because they:
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-make loans to banks and thrifts -accept the deposits of banks and thrifts
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A second and broader definition of money includes
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M1 plus several near-monies
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What characterizes an MMDA
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-Interest bearing -Containing a variety of short-term securities
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The 12 Federal Reserve Banks are quasi-public banks, which blend ___ ownership and public control
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private
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The US' 12 Federal Reserve Banks act as a central bank because their policies are coordinated by ___?
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the Fed's Board of Governors
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What serves as bankers' banks?
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The 12 Federal Reserve Banks, collectively known as the Central Bank.
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The Board of Governors (with the aid of the Federal ___ ___ Committee make the basic policy decisions that provide monetary control of the US money and banking system.
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open market
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An ___ ___ is easily converted quickly into the most widely accepted and easily spent form of money, cash, with little or no loss of pucharshing power.
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Asset's Liquidity
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What is a function of money?
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- Unit of Account - Store of value - Medium of exchange
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___ ___ are certain highly liquid financial assets that do not function directly or fully as a medium of exchange but can be readily converted into currency or checkable deposits
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Near Monies
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M1 and M2 are components of the ___ supply
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money
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In the US, the monetary authorities are members of the Board of Governors of what?
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Federal Reserve System
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Who controls the lending activity of the nation's banks and thrifts?
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12 Federal Reserve Banks
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Federally charted banks are required to purchase ______ of the Federal Reserve Bank in their district.
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stock
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What are components of M1?
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All checkable deposits Currency in the hands of the public
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Because money is a medium of exchange, society avoids:
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barter
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Cash is perfectly ___?
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liquid
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What are examples of assets other than money that hold wealth?
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Real estate Gold Stocks Bonds collectible items such as fine arts or comics
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The Fed's major goal is to control the ____ ____.
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money supply
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True or False: Federal Reserve Banks compete with commercial banks
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False
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Who issues U.S. paper currency?
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The Federal Reserve Banks
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What is meant by the term \"thrifts\"?
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Mutual saving banks Savings and loan associations Credit unions
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The purpose of the open-market operations is to control the nation's money supply and influence ___ ___.
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interest rates
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The FOMC meets regularly to direct the purchase and sale in the open market of government securities such as:
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Bills Notes Bonds
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Where is the location of the Federal Reserve Bank which conducts most of the Fed's open-market operations?
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New York City
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The safety and convenience of ___ has made checkable deposits a large component of the M1 money supply.
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checks
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How long are the terms of the chairperson and vice-chairperson of the Board of Governors?
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4 years
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The ____ selects the chairperson and vice chairperson of the Board of Governors from among the members.
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president
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True or False: In terms for Board of Governors members, one member is replaced every 2 years.
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True
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True or False: In terms for Board of Governors members, all members are replace simultaneously.
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False
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True or False: In terms for Board of Governors members, one member can only have 1 term.
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False
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True or False: In terms for Board of Governors members, their terms last for 14 years.
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True
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People can convert __ __ into paper money and coins on demand.
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checkable deposits
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What characteristics of checks has made checkable deposits a large component of M1 money supply?
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Convenience Safety
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The Fed has the ultimate responsibility for regulating the supply of ___
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money
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Commercial bank operations are supervised by the?
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Federal Reserve banks
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How is the Federal Reserve Bank able to influence interest rates?
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By controlling the money supply
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What is the roles of commercial banks
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Makes available for a wide variety of loans Keeps money safe until demanded via checks Accepts deposits of households and businesses
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What are the functions of commercial bank loans?
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Finance consumer purchases of durable goods Provide short-term financial capital to businesses
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Studies show that countries that have independent central banks, such as the Federal Reserve Bank, compared to those that have little or no central bank independence, have lower average rates of ___
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inflation
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___ established the Fed as an independent agency of government to protect the Fed from political pressures so that it could effectively control the money supply and maintain price stability.
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Congress
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Why is currency held by the US Treasury, the Federal Reserve Banks, commercial banks, and thrift institutions excluded from M1 and other measures of the money supply?
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To avoid counting the same amount of value twice.
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Metal coins are issued by the US
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Treasury
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What is the difference between how coins and paper money are issued?
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Coins are issued by the US Treasury, while paper money is issued by the Federal Reserve System.
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____ ___ are primary depository institutions that accept deposits of households and businesses, keep money safe until it is demanded via checks, and in the meantime use it to make available a wide variety of loans.
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Commercial Banks
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What is the relationship between commercial banks and thrift institutions?
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Thrift institutions supplement commercial banks
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What functions money?
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-It serves as a yardstick for measuring the relative worth of things -Something that enables people to transfer purchasing power from the present to the future -Anything that is usable for buying goods and services.
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Money is a _____ that is usable for buying and selling goods and services
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medium of exchange
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Money serves as a _____ that enables people to transfer purchasing power from the present to the futures.
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store of value
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What are the problems that occurred with decentralized, unregulated banking, which led Congress to decide that centralization and public control were essential for an efficient banking system?
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Numerous private bank notes being used as currency Episodes of monetary mismanagement by banks
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A banking crisis could emerge when individual and businesses who have lost confidence in their banks attempt to simultaneously __ all of their money.
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withdraw
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The banking crisis of 1907 inspired the creation of:
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Federal Reserve Act of 1913
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Saving and loan associations are example of what?
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thrift institutions
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Thrift institutions supplement
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commercial banks
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The ___ of the United States consists primarily of metal coins and paper money.
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currency
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When individuals and businesses lose confidence in their banks and attempt to simultaneously withdraw all of their money, what could emerge?
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a banking crisis
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The Federal Reserve Banks do not deal with the ___ but, rather, they interact with the government, commercial banks, and thrifts.
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public
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