Banks/Interest

Define a financial intermediary?

-institution that sits between savers + borrowers

-help move funds from people who have extra money to people who need money

-collect small deposits and lend funded pools

Why is a bank a financial intermediary

-accepts deposits from savers

-makes loans to borrowers

-uses deposits as a source of funds for loans

Define

-reserve

-deposit

-the difference between both

a. Deposit

-money you put in the bank

-personal asset

-it is a liability for the bank because they owe it to the person on demand

b. Reserve

-part of the bank’s funds that keeps on hand

-cash the bank actually holds

-keep an amount to honor giving money back to owner

Define fractional reserve banking

-banking system in which banks keep only a fraction of their customers deposits as reserves

-they lend the rest

-don’t hold 100% of deposits in cash(create additional money in the economy)

What is the money creation formula?

-what is the purpose of the formula?

-estimate how much money suppply will change( entering or leaving banking system

-fraction the bank keeps in reserves

Money multiplier: 1/reserve ratio

Change in Money Supply: (1/reserve ratio) * monetary base

Define bank runs

-large number of a bank’s depositors try to withdraw their money at the same time( due to money isn’t safe)

-bank only keeps a fraction of deposits as reserves(not everyone can be paid cash at once)

What regulations are in place to prevent bank runs? -

a.Deposit insurance(FDIC in the U.S)

-guarantees deposits up to 250,00 per depositor

b.Banks must keep some funds as reserves

c.Banks hold enough capital/monitor their risk for making failures

d.The Federal Reserve bank can lend money to banks that are short on cash

What is the Federal Reserve?

-what does it regulate and does is it not involved in?

-central bank of the U.S.

-goals are to ensure stable prices, maximum sustainable employment, and a stable financial system

-Conducts: monetary policy(influences interest rates + money supply

-Does not set tax policy or government spending

Define Quasi government institution

-federal bank has features of both government + private institutions

-federal bank is designed to operate independently

Define the Board of Governors?

-Define the Chairman?

a.Board of Governors

-7 member body at U.S capital

-appointed by the President/Sentate

-set broad policy direction for the Federal Bank

B.Chairman

-leading public face of the Fed

-can set short term interest rates

-guides/coordinates policy/communicates to congress,markets, public

Define the role of Regional Federal Reserve Banks

-extending branches located in different districts

-provide services to banks/supervise banks

Define Theory of Liquidity Preference

-where does supply of money come from?

-where does demand of money come from?

Idea: the interest rate adjusts to balance the supply of money + demand for money(liquidity)

-Supply of money: set by central bank(Fed)

Demand for money: comes from households + firms

What are shifters in the money market that affect interest rates + investments?

a. Money market

-what shifts money supply?

-what shifts money demand?

-how does this affect interest/investment

b. Market for Loanable Funds

-what affects supply of loanable funds?

-what affects demand for loanable funds?

-how does this affect interest/investment

-a.Money market

-shifts money supply: open market operations, shifrt supply curve

-shift demand: changes in income, price level, financial innovation)

Higher money demand = high interest rates + low investment

Low money supply= high interest + low investment

low money demand= low interest rates, high investment rates

-high money supply= low interest rates, high investment rates

b. Market for Loanable funds

-shifts of supply of loanable funds: comes from savers(households, firms), more saving shifts curve right

-shifts for demand of loanable funds: comes from borrowers(firms investing, households spending, shift curve right

high demand( more desire to borrow), high interest rate, high rate of investment

-low supply(more saving), low interest rate, low investment rate

Concept: Interest Rates People Track

Define Federal Funds rate?

-interest rate banks charge each other for overnight loans of reserves at the Fed

Concept: Interest Rates People Track

Define Discount Rate

-interest rate the Fed charges banks when they borrow directly from the Federal Reserve

Concept: Interest Rates People Track

Define IBOR?

-interbank offered rate

-interest rate which large international banks lend to each in major currencies

Concept: Interest Rates People Track

What is the short term rate( 3 month T bills)?

-yield on 3 month U.S treasury bills

Concept: Interest Rates People Track

-Define Long Term rates ( 10 year T bill)?

-yield on 10-year U.S treasury securities

-benchmark for long term borrowing

Concept: Interest Rates People Track

Define Prime Rate?

-benchmark rate that banks quote as their rate for most creditworthy business customers

Concept: Interest Rates People Track

Define 15 year mortgage rate?

Define 30 year mortgage rate?

-interest rate households pay on a fixed rate 15 year home mortgage

-interest rate on a fixed on a 30 year home mortgage(have higher interest rate due to risk)