ECON 2301 Exam 2 Flashcards (ACC, Briggeman)

origins of the Federal Reserve

The Federal Reserve was created in 1913 after concerns about bank failures, especially after the financial crisis of 1907. It was created to regulate banks, provide reserves, and lend to banks when needed.

process or sequence of events by which gold ceased to be part of the U.S. monetary base

Before the 1900s, gold and silver were money. The Federal Reserve was created in 1913, and during the 1933 banking crisis the government took actions that removed gold and silver from use as money, replacing them with dollar bills and reserves.

the 2007–2009 financial crisis

A financial crisis caused by falling housing prices, risky lending, and declining bank asset values. It caused the worst recession since the Great Depression.

why does the federal government often borrow money rather than print money?

The government borrows because printing money increases base money and can expand lending, while borrowing transfers existing money from lenders to the government.

wealth

A stock measured at a point in time; the value of what someone owns minus what they owe.

income

A flow measured over a period of time; money earned through wages, profits, or other sources.

stock

A quantity measured at a specific point in time.

flow

A quantity measured over a period of time.

difficulties in measuring wealth

Wealth is harder to measure because assets must be valued and some assets do not have clear market prices.

relative ease of measuring income

Income is easier to measure because payments such as wages and profits are recorded as they occur.

assets

Things a person or organization owns or has a claim to.

debts

Money or obligations that a person or organization owes.

present value

The value today of future payments or income.

net worth

The value of assets minus liabilities or debts.

national income

The total income earned in a nation from economic activity.

wages

Payments received by workers for providing labor.

salaries

A fixed form of wages usually paid on a regular schedule.

business profits

Revenue remaining after a business subtracts its costs.

transfers

Payments received without directly providing a good or service in return.

capital gains

An increase in the value of an asset, such as property or stocks.

money

Anything generally used as a medium of exchange, unit of account, and store of value.

forms of money today

The three forms are dollar bills/coins, deposits, and reserves.

deposits

Money recorded in a bank account; a promise from a bank to make payments to the depositor.

reserves

Money held by banks in accounts at the central bank.

base money

Dollar bills and reserves.

bank money

Deposits created and used through banks.

assets and liabilities

Assets are things owned or owed to a business; liabilities are things a business owes to others.

bank balance sheet

A record showing a bank's assets, liabilities, and net worth.

loans

A bank asset consisting of a borrower's promise to make future payments.

bonds

A financial asset where a borrower promises repayment with interest.

interest rate

The price paid for borrowing money, usually expressed as a percentage over time.

how banks earn profits

Banks earn profits by paying lower interest on deposits and charging higher interest on loans.

borrowing short and lending long

Banks accept short-term deposits and use them to make longer-term loans.

how banks obtain dollar bills or reserves

Banks can borrow, sell assets, attract deposits, borrow from the central bank, sell ownership, or adjust payments.

why banks need trust

Banks rely on confidence because depositors must believe banks can fulfill payment promises.

deposit insurance

A system that protects depositors and helps maintain confidence in banks.

why banks create money

Banks create money when they create deposits through lending.

money creation by banks

A bank creates deposits when it gives a borrower a loan, creating new promises on both sides.

limits on money creation

Banks are limited by their ability to make payments, obtain reserves, and find reliable borrowers.