ch. 14 federal reserve system

open market operations is the primary tool to change ____ ___

monetary supply

• Buying Securities:

  • Increases money supply

  • Banks' reserves are credited, allowing more lending

• Selling Securities:

  • Decreases money supply

  • Money is taken out of circulation as banks pay

• Impact on Interest Rates:

  • Increased reserves lower interest rates (cheaper borrowing)

  • Decreased reserves raise interest rates

define asset

anything that can depreciate in value

• cash is the most liquid in assets

wealth =

assets - liabilities

define liquidity

ability to change an asset into cash

2 biggest categories in money supply

• currency in circulation

  • cash held by public

• checkable bank deposits

  • bank account on which ppl can write checks

define money supply

total value of financial assets in economy

define medium of exchange

something people accept as payment for goods and services

• coincident indicator: reflects the current state of the economy, moving up or down; used to assess current economic conditions and inform decisions

• double coincidence of wants: a situation in a barter system where 2 parties must both want what the other has to offer for a trade to occur

store of value

money is means of holding purchasing power over time

• saving

unit of account

money provides yardstick for measuring & comparing the values of a wide variety of goods & services

commodity money

a good, normally gold or silver, used as a medium of exchange that has intrinsic value in other uses.​

• intrinsic value

commodity-backed money

medium of exchange with no intrinsic value; the ultimate value is guaranteed by a promise that it can be converted into valuable goods

fiat money

money whose value derives entirely from its official status as a means of payment.

• $20 is intrinsically worth less than $1

Monetary aggregate

an overall measure of the money supply

• treasuries

• CDs

• money in bank; savings & checking account (have $10k saved);

• savings earns interest

2 measures of money supply

M1

• includes only the most liquid forms of money. Money in circulation, demand deposits, and other checkable deposits

M2

• includes M1 plus near-moneys: financial assets that can’t be directly used as a medium of exchange but can readily be converted into cash or checkable bank deposits

Which of these assets would you classify as being the most liquid?​

1. demand deposits​

2. small-time deposits​

3. a house​

4. gold bullion

demand deposits​

T/F: state banks can’t go brankrupt

T

Net worth represents

the value of the firm to its stockholders or owners

total reserves =

required + excess

• "reserves" is implied that it's total

define required reserve ratio & provide formula

percentage of its total deposits that a bank must keep as reserves at the Fed Reserve

RRR = (Commercial bank’s​ Required reserves​) / (Commercial bank’s​ Checkable-deposit liabilities​)

T-account

a tool for analyzing a business’s financial position by showing the business’s assets and liabilities.

reserves (total) = ?

reserve ratio = ?

Reserves (Total) = $100,000 / Assume excess reserves = 0​

Reserve ratio: the fraction of bank deposits that a bank holds as reserves ($100,000/$1,000,000 = 10%)

define bank run

everyone runs to bank & pulls everything out

• withdrawing funds (defaulting on funds)

example:

• lending out my money; percieve that bank has high default rate, take money out; run on the bank (bank run)

  econoic decline

FDIC

independent fed agency insuring deposits in US banks and thrifts in the event of bank failures

• maintain public confidence and encourage stability in the financial system through the promotion of sound banking practices.

Monetary​ multiplier​ formula

1 / R

• R = required reserve ratio

private banking

biggest concern is making sure they get their money back; loaners have most productive use for it; no competition; give money out to those who have connections; diminishes economic growth