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us treasury, financial institutions, federal reserve system
what three organizations create money in the us
minting and selling coins to federal reserve banks
how does the us treasury create money?
lending consumer’s deposits to other individuals who redeposit money to other institutions
how do financial institutions like commercial banks create money?
federal reserve bank
most new money begins its life where?
federal reserve bank
what is the us central bank
currency, regulating banking activity, acting as the government’s bank, controlling money supply
what is the federal reserve bank responsible for?
1913
year the us established a central bank
12
congress divided the nation in to how many districts, each with a central bank
tasks of district banks
three bankers, three businesspeople, three representatives of the public
members of the board of directors
district bank
what does the board of directors supervise?
Fed’s Board of Governors and the Federal Open Market Committee
who makes virtually all decisions regarding the money supply
seven
number of people on the board of governors
president appoints them, congress confirms them
how are members of the board of governors selected
reserve requirement
a specified percentage of depositors’ money that must be kept on hand by banks
supervise commercial and 12 district federal reserve banks, enforcing customer protection laws
what does the board of governors do?
federal open market committee
FOMC stands for
board of governors (7) and five federal reserve district bank presidents
members of the FOMC
politically, financially, operationally
three ways the federal reserve system is independent
term on the board of governors expires every two years
how is the fed politically independent
sets and operates under its own budget
how is the fed financially independent?
financial records are exempt from audit; no one may dictate its actions
how is the fed operationally independent?
congress may remove members from the board of governors for cause, and the fed depends on congress by its existence as it was created by congress
two checks on the fed’s power
provide uniform currency, regulate member banks, clear checks, acts as a fiscal agent, serves as banker’s bank, creates money
functions of the federal reserve system
elastic currency
a money supply that can be expanded or contracted
us treasury
who creates federal reserve notes
monetary control act of 1980
what act did congress establish in order to prevent banks from escaping regulations by going to state banks?
clearing
every check or debit card transaction requires
fiscal agent
an entity such as a bank that handles financial matters for another party
holds government’s checking account, makes loans to us treasury, gives government financial advice
three parts of the fed’s role as the government’s fiscal agent
run on the bank
a rush of depositors to the bank seeking to withdraw their money
the fed
who is the lender of last resort
lender of last resort
an agency able to lend money to banks when a greater than expected number of depositors wants to receive cash from their accounts
the money multiplier effect
to increase the money supply, the fed relies heavily on
money multiplier effect
the expansion of the money supply as a result of commercial banks’ lending their depositors’ money to to others
money multiplier
the factor that represents the number of times a deposit may be multiplied as it experiences the money multiplier effect
banks don’t lend all excess reserves, and people won’t redeposit the whole amount
why is the money multiplier unreliable?
discounting
the lending of money to banks by the federal reserve system
discount rate
the interest rate charged by the fed to banks for borrowed money
changing discount rate, changing reserve requirement, using open market operations
three tools of money creation
open market operations
the purchase or sale of government securities by the federal reserve system to inject or withdraw money from the money supply
reduces, slows
increasing discount rate _ the money supply and _ the economy
increases, accelerates
decreasing discount rate _ the money supply and _ the economy
reduces, slows
increasing reserve requirement _ money supply and _ the economy
increases, accelerates
decreasing reserve requirement _ money supply and _ the economy
slowed
rising interest rates mean that the economy is
accelerating
falling interest rates indicate that the economy is
monetary policy
the increasing or decreasing of money supply in order to influence the economy
tight monetary policy
the use by the federal reserve system of one or more of the policy tools to reduce the money supply
loose monetary policy
the use by the federal reserve system of one or more of its policy tools to increase the money supply
inflation, slow economic growth and unemployment
a tight monetary policy tends to curb _, but can increase risk of
economic growth; inflation
a loose monetary policy tends to encourage _ but makes _ more likely
less
as interest rates rise, people will borrow _ money
more
as interest rates fall, people will borrow _ money
demand would exceed supply aka overheating
what would happen if the fed continued to print money beyond the limits of the economy
decrease growth rate of money supply and cause interest rates to rise
how can an overheated economy be cooled down?
money
anything a society commonly uses and generally accepts in payment for goods and services
legal tender
a form of money that the government declares must be accepted by creditors if it is tendered by a debtor
means of payment for goods and services, measure of value, means of storing purchasing power
three functions of money
barter
exchange of one person’s goods and services for another’s
coincidence of wants
both parties of a trade wanting what the other has to offer
more effective than barter
money as a means of payment means that it is
standard of measurement
money as a means of value means that it can be used as a
it retains face value over time
money as a means of storing purchasing power means that
convenience, portability, divisibility, durability, stability
desirable characteristics of money
commodity, representative, fiat
three kinds of money
commodity money
a single commonly used good becomes the medium of exchange
salt, gold, seashells
commodity money examples
inflation
commodity money tends to lead to
full-bodied coin
a coin contains an amount of gold or silver equal to its face value
token coin
a coin contains a quantity of metal less than its face value
representative money
money that represents a commodity that some entity holds in store
fiat money
money without gold or something of substantive value backing it
faith that others will accept money, limited quantity of money that exists
what keeps the fiat money system functioning
M1
measure of money Americans have available for immediate spending
M1
paper and coin money held by the public, traveler’s checks, checking accounts
M2
money consumers could immediately spend and all money available to spend after a short delay
M2
includes a variety of savings accounts
fractional reserve banking
a banker lends more paper money than he can back in gold
financial market
collection of organizations that assist households in channeling their money to businesses and the government
commercial banking industry
largest participant in the financial market
commercial banks
function by accepting deposits from customers and making loans
free banking
no national banking system
1836-1864
free banking occurred from
national banking act
to end confusion over worth of bills and provide revenue for the government after the civil war, what act was passed
established national banks, uniform currency, taxes on currency of private banks (broke many private banks)
national banking act did what
dual banking (state and federally chartered)
national banking act left america with what system
charter
authorizations for banks to exist
us treasury’s comptroller of the currency
federal authorization comes from the
state banking commissions
state authorization comes from
comptroller of the currency
supervises and regulates banks with national charters
federal reserve bank
regulates state banks that choose to join the federal reserve system
federal deposit insurance corporation
banks that don’t join the frs but desire to be insured
state banking authority
state banks that are not members of the frs or ensured by fdic are under the supervision of
accept deposits, extend loans, provide miscellaneous services
three roles that commercial banks play in the us financial market
savings and loan, mutual savings banks, credit unions
types of thrift institutions
thrifts
encourage personal saving and provide loans to meet personal needs
savings and loan association
financial institution designed to collect savings and use that capital to make loans
mutual savings banks
similar to savings and loans except for technicalities; almost exclusively in the northeast
credit unions
originate with groups of people with a common interest’ pool savings of members and make consumer loans available
Note
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