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Module 18 Notes

Uploaded by

reeyanpeekaboo69
Copyright
© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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MR ZIRKLE VIDEOS

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Money is a thing that is generally accepted as a form of payment:
1. Medium of exchange
2. Measuring value in the economy - unit of account
3. Store of value - Accumulation of wealth by holding dollars

Savings accounts are the biggest part of M1.

Three parts of the Federal Reserve are the board of seven members, the 12 regional
banks, and the FOMC. The banks oversee their regions. FOMC brings the members from
board and regional banks to help set monetary policy.

Fed functions:
● Conducting a nation’s monetary policy
● Goals mandated by the U.S. Congress

Federal funds rate - Lowering it causes an easing of monetary policy. Raising it is used if
economy is overheating

Monetary policy - Controlling a nation’s overall supply of money through a bank


Fiscal policy - Handles government taxes
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BOOK
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Barter - Trading one good or service for another
Double coincidence of wants - A situation where both people want what the other person
has

Barter prevents the economy from growing.

Money advantages:
● Medium of exchange - Can be used to purchase items
● Store of value - Holds usually the same amount of value
● Unit of account or measuring price - Can be used to measure values
● Standard of deferred payment - Payment can be contracted and made at future
date

Commodity money - An object that is used as money but also has other attributes that
make it useful somewhere else
Commodity-backed money - Currencies backed up by gold or other commodities held in
a bank

Fiat money - Has no intrinsic value, but is declared to be a country’s legal tender
M1 Money supply - Includes monies that are very liquid such as cash, traveler’s checks
and demand deposits, savings account
M2 Money supply - Less liquid, such as certificates of deposit and money market funds
plus M1 money supply

Government changed the definition to include savings in M1. M1 includes coins and
currency in circulation that isn’t held in the Federal Reserve Bank.
Demand deposits - Checking account where money can be saved and accessed

Money market funds - Pools together many investor’s money and invests them in a safe
way short-term

Time deposits - Accounts which are left for a certain amount of time in the bank ranging
from a few months to few years

Modern banks don’t have piles of cash available anymore, but instead money is stored in
bank accounts. They allow people to deposit money.
Transaction costs are costs associated with finding a lender or a borrower for money.

Financial intermediary - An institution that operates between a saver who deposits


money in a bank and a borrower who receives a loan from that bank

Depository institutions - Institutions that accept money deposits and then use these to
make loans

Bank net worth = Bank capital


Balance sheet can also be called T-account

Primary loan market is where institutions make loans to borrowers, and secondary loan
market is where institutions sell loans to other institutions.

Categories of bank assets:


● Loans
● Bonds - Typical bonds issued by U.S. government, and are investments of banks
● Reserves - Money the bank keeps in hand
I. Limited reserves - When banks are at or slightly above their minimum reserve
II. Ample reserves - When they are plenty above their minimum reserve

Asset-liability mismatch - The ability for banks to withdraw bank’s liabilities in the short
term while customers customers repay its assets in the long term

Monetary policy - The manipulation of interest rates and credit conditions by a central
bank
The organization responsible for monetary policy and ensuring the financial system runs
smoothly is the central bank.
At the national level, it is run by a board of seven members appointed by the president
and confirmed by the senate and has a chair (14 year turns). It also includes 12 regional
Federal Reserve Banks.

The Federal Reserve Board has examiners who make sure banks don’t collapse. Bank
run is when depositors run back to withdraw their deposits.

The Federal Reserve Bank serves as the lender of last resort to prevent banks from
failing and assuring deposit insurance.

Quantitative easing - Willingness to make short-term credit available in a time of financial


stress on banks

Most common policy tool is open market operations, when the central bank buys or sells
U.S. Treasury bonds to influence the quantity of bank reserves and interest rates. The
Federal Open Market Committee makes decisions about these.

When a central bank buys bonds, money is flowing from the central bank to individual
banks in the economy, increasing the money supply in circulation. When a central bank
sells bonds, then money from individual banks in the economy is flowing into the central
bank—reducing the quantity of money in the economy.

Discount rate is the interest rate paid on top of the loan used to quell the bank run.
Higher discount rates = less money supply, Lower discount rates = more money supply.

Reserve requirement - The percentage of each bank’s deposits that are legally required
to be held on deposit in the federal reserve or in cash in a vault. Higher reserve
requirement = lower supply, lower reserve requirement = higher supply.

Interest rate on reserve balances - Interest rate paid to banks for holding extra money in
their reserves

Quantitative easing - A form of monetary policy made to help increase money into the
supply. It involves the Fed purchasing long-term Treasury bonds instead of short-term
treasury bills.

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