Econ 333 - Money and Banking Test 3 Review Flashcards

Flashcards for reviewing key concepts from the Money and Banking course, focusing on Federal Reserve structure, money creation, and monetary policy.

Federal Reserve Bank

The central bank for the U.S., created by the Federal Reserve Act in 1913, responsible for bank supervision, monetary policy, and services to banks and the government.

Responsibilities of the Federal Reserve Bank

Bank Supervision, Monetary Policy, Services to Banks and the Government

Federal Reserve Bank Organization and Structure

12 Regional Banks headed by Presidents chosen by private board, Governors (headed by Chairperson) chosen by President of the U.S. & the U.S. Senate, Policy-making group at the Fed = Federal Open Market Committee

Advantages of Fed Independence

Avoid political business cycle, able to focus on long term, those controlling money supply different from those who spend money, Fed policy strictly economic

Characteristics of a Good Central Bank

Good central bank: accountability, transparency of policy decisions, decisions by committee, independence, good policy framework

Fractional Reserve System

Banking system in US where only a fraction of deposits are set aside.

Reserve Ratio

Fraction of deposits set aside

Money Creation Process

Banks create money by making loans. Loans create new deposits.

Deposit Multiplier

1/reserve ratio

Maximum Total Deposits

Total reserves X deposit multiplier

Monetary Policy

Changing the Money Supply (M1 = currency in circulation + Demand Deposits)

Three Ways the Fed Can Influence Money Creation

Setting the reserve requirement, Open Market Operations, Setting the Discount Rate and Federal Funds rate target

Goals of Monetary Policy (Federal Reserve Act)

Economic Growth = low unemployment, Price Stability = low inflation

Expansionary Monetary Policy

Increase the Money Supply, the Fed would: lower reserve ratio, buy securities, lower Federal Funds and Discount rates.

Contractionary Monetary Policy

Decrease the money supply, the Fed would: raise reserve ratio, sell securities, raise the Federal Funds and Discount rates.

Federal Open Market Committee (Policy Making Group at Fed)

consists of 12 members (Board of Governors, President of NY Fed, 4 others)

savers and borrowers have to take time and effort to find each other

With direct finance, high transaction costs occur mainly because

more in one year (higher future value)

In one year you will receive a $100 bill. If the interest rate today rises from 5% to 10% the $100 bill you will receive one year from now becomes worth

the supply of bonds increases more than the demand for bonds

Based on the Bond Market model, interest rates will rise during an economic expansion because

During a recession

firms have fewer investment opportunities so the supply of bonds decreases

Fisher Effect

higher expected inflation shifts both demand and supply to result in unambiguously higher nomial interest rates

Longer maturity interest rates are always higher than shorter maturity rates

Which has NOT been observed about interest rates

Open Market Operations

changes reserves and creates new loans by buying or selling government securities to influence the money supply.

Discount/Federal funds rate

can either encourage or discourage bank lending

Goal of Monetary Policy

Economic growth and Price stability are the primary goals of monetary policy to maintain sustainable economic development and control inflation.

Why is there conflict amongst goals of unemployment and inflation?

there is a negative relationship between inflation and unemployment , Phillips Curve. Require opposite policies.