Econ Test 5

Functions of money

Medium exchange

Store of value

measure of value

medium of exchange

accepted in exchange for goods and services

measure of value

express the worth in understandable terms

store of value

purchasing power saved until it's needed

barter economy

money-less economy reliant on trade
*exchange rate/fair value
*mutual coincidence of wants
ex: swap meet

mutual coincidence of wants

Trade which results in both parties gaining value from the exchange

Types of money

fiat
commodity
representative

fiat

government decre

commodity

alternate use

representative

backed by gold or silver (specie)

historical changes in the banking system

-strong central banks created to coordinate policy- The us has experienced periods in which there were runs on the banks, regulations on banks increased during the depression, FDIC and NCUA now insure accounts, deregulation during 1980-1990 led to problems, 2008-gov bailout of banks resulting from housing crisis and issuance of subprime loans

commericial banks

most common financial institutions

credit unions

co-op owned by its members, common bond?

finance company

installment high interest loans

FDIC

(Federal Deposit Insurance Corporation)that protects bank depositors against the loss of their insured deposits in the event that an FDIC-insured bank or savings association fails.

bank examiner

Supervision is making sure that the banks are protecting your money
Examiners go out and visit banks to look at data, their systems, their records

Alexander Hamilton

father of U.S. banks

money supply

the total amount of money in circulation or in existence in a country

impact of high and low interest rates on the economy

interests can be raised (to slow down the economy) or lowered(to speed up the economy)

M1

liquid (money you can easily get) checking account, cash

M2

less liquid ( little tougher) savings accounts, CD’s

Structure of Federal Reserve System

the Board of Governors, 12 Federal Reserve Banks, and the Federal Open Market Committee.

current chairman of fed

Jay Powell

Services and Functions of the Fed

holds an account for the treasury department(tax refund)
-banker for US government- bond auctions
-services- loans and deposits
-regulate member banks(examinations)
bank holding companies
International operations
member bank mergers

More functions of the Fed

-consumer protection (fairness and loan approvals trust and lending disclosures)

-set margin requirements (% to buy stock on credit)

-monetary policy (control the money and interest rates to control the economy)

reserve requirement

proportion of deposits that must be held as reserves

open market operations

fed purchases or sales of government bonds (more money out there is higher interest rates, less money higher rates)

discount rate

interest rate of the fed charges banks on short term loans

federal funds rate

interest rate banks charge each other on short term loans

Prime Rate

best rate that banks charge on loans (people with good credit scores)

Moral Suasion

also used to influence economy (everything is impactful)

interest rates changes

affect borrowers and savers (& politicians)

tight money policy (tightening)

contractionary

higher interest rates; slower economic growth (increase unemployment) and inflation

easy-money policy (easing)

expandtionary

lower interest rates; increase economic growth(lower unemployment); limit deflation

demand deposit

a deposit of money that can be withdrawn without prior notice.

difficulties with monetary policy

time lag - doesn’t have affect right away

may contradict fiscal policy

stagflation- high employment and high inflation (in theory shouldn’t every happen)

MV=PQ

helps in understanding inflation & Fed policies

fractional reserve banking

system requiring financial institutions to set aside a fraction of their deposits in the form of reserves or vault cash

money creation process

Banks create money by lending excess reserves to consumers and businesses.

inflation

a general increase in prices and fall in the purchasing value of money

stagflation

high unemployment, high inflation

pro of a credit card

rewards

more fraud protection

allows someone to buy something even when they have no cash on them or in their account

credit score

pros of a debit card

no interest

access to cash

curb overspending

cons of a credit card

potential interest- you make a late payment or exceed the credit limit, the high interest of 13% rises on your card
overspending

cons of a debit card

less fraud protection

no credit score

overdraft fees

Money

anything generally accepted as a medium of exchange

characteristics of money

portability - easily handled

durability - doesn’t deterate

divisibility - smaller units

limited supply- pervent inflation

uniformity - accepted and understood

acceptiblity - medium of exchange

Types of money and who/what issued varied

thousands of different currency

secret service - invesgestates counterfitting

strong central banks are

created to coordinate policy ( ex. federal reserve)

U.S. Currency is now Fiat money

not backed by gold or silver

U.S. has experienced periods where there were

Runs on the banks - money for all the deposits doesn’t just sit in the banks

regulations on banks increased during..

the Great depression

FDIC and NCUA now insure accounts

250,000$ saved if you lose anything

FDIC - Banks

NCUA - Credit Unions

Degulations during the 1980’s- 1990’s led to problems

Risky rules and investments

-Getting rid of rules

2008 government bailout of banks resulted

from housing crisis and insurance of Subprime loans

Federal reserve System (FED)

central bank of the US created in 1913

member banks

owns the system