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Macro Chapter 16
Terms in this set (65)
exchange of one good for one service
double coincidence of wants
the unlikely occurrence that two people each have a good the other wants
what is wasted when we barter?
time is wasted searching for others to trade with
set of assets that people regularly use to buy goods and services from other people
3 functions of money
1) medium of exchange
2) unit of account
3) store of value
medium of exchange
an item buyers give to sellers when they want to purchase goods and services
unit of account
the yardstick people use to post prices and record debts
store of value
an item people can use to transfer purchasing power from the present to the future
Money enables us to separate
assumption and consumption
Two finds of money?
commodity money and fiat money
takes the form of a commodity with intrinsic value (example: gold coins, cigarettes at a POW camp)
money without intrinsic value, used as money, because of government decree (example: U.S. dollar)
the money supply (or money stock)
the quantity of money available of money available in the economy
2 assets are considered part of the U.S. money supply
(U.S. uses fiat money)
currency and demand deposits
the paper bills and coins in the hands of the public (non-bank)
balances in the bank accounts that depositors can access on demand by writing a check
2 types of measures for U.S. Money
M1 & M2
currency, demand deposits, traveler's checks & other checkable deposits
everything in M1 + savings deposits, small time deposits, money market mutual funds and a few minor categories
an institution that overseas the banking system and regulates the money supply
the setting of the money supply by policymakers in the central bank
Federal Reserve (the Fed)
the central bank of the U.S.
Structure of the Fed
The Federal Reserve System consists of:
1) Board of Governors (7 members from D.C.)
2) 12 regional Fed Banks (located around the U.S.)
3) Federal Open Market Committee (FOMC) - which includes 1&2 but only 5/12 of Fed banks get to vote
Who decides monetary policy?
the FOMC = 7 board of governors and 12 regional banks (but only 5/12 banks get to vote)
In a fractional reserve banking system...
banks keep a fraction of deposits as reserves and use the rest to make loans
The Fed establishes reserve requirements. What are reserve requirements?
regulations on the minimum amount of reserves that banks must hold against deposits
The reserve ratio (R)
the fraction of deposits that banks hold as reserves --> the total reserves as a percentage of total deposits
The reserve ratio = (reserves)/(deposits)
a simplified accounting statement that shows a bank's assets and liabilities
What's included in a bank's liabilities? Assets?
Liabilities = deposits
Assets = loans and reserves
What happens in no banking system when $100 is deposited?
public holds $100 as currency and the money supply = $100
what happens in a 100% reserve banking system when $100 is deposited?
public deposits the $100 at First National Bank and then FNB holds 100% of deposit as reserves
the money supply = (currency) + (deposits)
$100 = ($0) + ($100)
In a 100% reserve banking system banks do not affect size of money supply
what happens in a factional banking system assuming R=10% and $100 is deposited?
The bank can loan out all but 10%, meaning $90 becomes currency. Since money supply = (currency) + deposits) --> ($90) + ($100) = $190. The money supply becomes $190.
In a fractional reserve banking system:
1) money supply grows when...
2) A FRB system creates ____ not ____
3) money is created with each new ___
1) money supply grows when banks make loans - they create money
2) a FRB system creates money not wealth
3) money is created with each new loan
The money multiplier
Example when r= 10%
the amount of money the banking system generates with each dollar of reserves
Money multiplier = 1/R
m.m = 1/r
1/.10 = 100
$100 of reserves creates $1000 of money
While cleaning your apartment, you look under the sofa cushion and find a $50 bill (and a half-eaten taco). You deposit the bill in your checking account.
The Fed's reserve requirement is 20% of deposits.
A. What is the maximum amount that the money supply could increase?
B. What is the minimum amount that the money supply could increase?
A. $250 = max $ supply
B. $200 = increase
the resources a bank obtains by issuing equity to its owners
(bank assets) - (bank liabilities) = bank capital
the use of borrowed funds to supplement existing funds for investment purposes
leverage ratio (equation)
the ratio of assets to bank capital
= (total assets) / (bank capital)
if total assets = $1000 and bank capital = $50 what's the LR? and the interpretation of that?
LR = $20. Interpretation: for every $20 of assets, $1 is from bank's owners and the other $19 is financed with borrowed money
If a bank's asset decrease to the extent that bank capital is negative then
the bank is insolvent
a government regulation that specifies a minimum amount of capital, intended to ensure banks will be able to pay off depositors and debts
caused by too little capital
(responded by reducing lending)
what did our government do in the the credit crunch of 2009?
the Fed and the treasury injected hundreds of billions of dollars worth of capital into the banking system - which temporarily made U.S. taxpayers part-owners of money banks --> this helped restore lending to normal levels
The money supply (equation) if given money multiplier
Money supply = (money multiplier) * (bank reserves)
Meaning the Fed can change the money supply by changing bank reserves or changing the money multiplier
Open-market operations (OMOs)
the purpose and sale of U.S. government bonds by the Fed.
If the Fed buys a gov't bond from a bank...
it pays by depositing new serves in that banks reserve account
what happens with more reserves?
the bank can make more loans, increasing the money supply
What does the government do to decrease the money supply and reserves?
The Fed sells government bonds
Traditional method of the Fed making loans to banks (increasing their reserves
adjusting the discount rate to influence the amount of reserves banks borrow
the interest rate on loans the Fed makes to banks
New method (crisis only) of the Fed making loans to banks (increasing their reserves
Term Auction Facility - the Fed chooses the quantity of reserves it will loan, then banks bid against each other for these loans
The more banks borrow, the more ___ and increasing ____
The more banks borrow the more reserves they have for funding new loans and increasing the money supply
What happens when the Fed reduces the reserve requirements?
regulations on the minimum amount of reserve banks must hold against deposits
How do the affects of how household's hold their money and what banks do with their money create problems controlling the money supply?
If households hold more of their money as currency, banks have fewer reserves, make fewer loans, and money supply falls.
If banks hold more reserves than required, they make fewer loans and money supply falls.
Yet, Fed can compensate for household and bank behavior to retain fairly precise control over the money supply.
run on banks
when people suspect their banks are in trouble they may "run" to the bank to withdraw their funds, holding more currency and less deposits
When banks hold more reserves to satisfy depositors (lending less) what happens to R and the money supply?
R increases, causes money supply to fall.
Under a fractional reserve banking system do banks have enough reserves on hand to pay all depositors?
No. - if there's a run on banks to banks with a fractional reserve banking system then banks may have to close.
federal funds rate
On any given day, banks with insufficient reserves can borrow from banks with excess reserves. The interest rate on these loans is the federal funds rate.
The FOMC uses OMOs to target the federal funds rate
What happens when the fed funds rate changes?
it causes changes in other rates and have a big impact on the economy
What does the Fed do to raise the federal funds rate?
they sell government bonds (OMO) - this removes reserves from the banking system, reduces supply of federal funds causes the federal funds rate to rise.
in a fractional reserve banking system banks create ____ when they ___
in a fractional reserve banking system banks create money when they make loans
bank reserves have a ____ on the money supply
Because banks are highly leveraged, a small change in the value of a bank's assets causes...
a large change in bank capital.
To protect depositors from bank insolvency, regulators impose...
minimum capital requirements.
purchasing government bonds does what to the money supply?
selling government bonds does what to the money supply?
purchasing bonds = increases money supply
selling bonds = decreases money supply
THIS SET IS OFTEN IN FOLDERS WITH...
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Macro homework 2
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ECON 202 Chapter 16 and 17
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