econ unit test

central banking

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