Podcast
Questions and Answers
What is the primary purpose of open market operations conducted by the Fed?
What is the primary purpose of open market operations conducted by the Fed?
- To expand or contract the money supply in the economy. (correct)
- To influence the reserve-deposit ratio directly.
- To control the discount rate for interbank loans.
- To set regulations for how banks manage their reserves.
How does the Fed influence the reserve-deposit ratio through interest on reserves?
How does the Fed influence the reserve-deposit ratio through interest on reserves?
- By mandating banks to invest in securities rather than hold reserves.
- By increasing the reserve requirements imposed on banks.
- By lowering the interest rate paid on reserves, making holding reserves less attractive. (correct)
- By taking loans from banks at the discount window.
What does the discount rate refer to in the context of borrowing from the Fed?
What does the discount rate refer to in the context of borrowing from the Fed?
- The interest rate at which banks can borrow from the Fed using the discount window. (correct)
- The interest rate charged on loans from commercial banks to the Fed.
- The interest rate that banks pay on deposits held at the Fed.
- The interest rate set for government securities offered by the Fed.
What effect does a higher interest rate on reserves have on banks' reserve holdings?
What effect does a higher interest rate on reserves have on banks' reserve holdings?
Which of the following reflects a consequence of lowering the discount rate?
Which of the following reflects a consequence of lowering the discount rate?
What is the primary function of money as a medium of exchange?
What is the primary function of money as a medium of exchange?
Why is money considered the most liquid asset in an economy?
Why is money considered the most liquid asset in an economy?
Which property of money describes its ability to maintain its value over time?
Which property of money describes its ability to maintain its value over time?
What distinguishes fiat money from commodity money?
What distinguishes fiat money from commodity money?
Which of the following assets is an example of commodity money?
Which of the following assets is an example of commodity money?
What is considered when determining what counts as money within an economy?
What is considered when determining what counts as money within an economy?
How does money function as a unit of account?
How does money function as a unit of account?
What happens if prices are rising regarding money's function as a store of value?
What happens if prices are rising regarding money's function as a store of value?
What components are included in M1?
What components are included in M1?
What do banks do with the deposits they receive?
What do banks do with the deposits they receive?
Which expression represents the money supply in relation to the monetary base and ratios?
Which expression represents the money supply in relation to the monetary base and ratios?
What is the role of the central bank in the monetary system?
What is the role of the central bank in the monetary system?
What happens to the money multiplier when reserve requirements increase?
What happens to the money multiplier when reserve requirements increase?
How do changes in the currency-deposit ratio (cr) affect the money supply?
How do changes in the currency-deposit ratio (cr) affect the money supply?
Which component does NOT contribute directly to total bank liabilities?
Which component does NOT contribute directly to total bank liabilities?
What is the formula for the monetary base (B)?
What is the formula for the monetary base (B)?
Which of the following describes demand deposits?
Which of the following describes demand deposits?
What is total bank assets composed of?
What is total bank assets composed of?
What does an increase in the monetary base (B) lead to?
What does an increase in the monetary base (B) lead to?
What is one of the primary tools of monetary policy used by the Fed?
What is one of the primary tools of monetary policy used by the Fed?
Which of the following is an endogenous variable in the monetary system?
Which of the following is an endogenous variable in the monetary system?
How does the reserve-deposit ratio (rr) affect banks' loan-making ability?
How does the reserve-deposit ratio (rr) affect banks' loan-making ability?
Flashcards
Discount Rate
Discount Rate
The interest rate the Federal Reserve (Fed) charges banks for borrowing money directly from them.
Reserve Requirements
Reserve Requirements
Regulations set by the Fed that dictate the minimum amount of funds banks must hold in reserve, ensuring enough money to meet customer withdrawals and maintain stability.
Interest on Reserves
Interest on Reserves
The interest rate the Fed pays banks on the reserves they hold at the Fed.
Open Market Operations
Open Market Operations
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Reserve-Deposit Ratio (Fed's Control)
Reserve-Deposit Ratio (Fed's Control)
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What is money?
What is money?
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Liquidity
Liquidity
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Store of Value
Store of Value
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Unit of Account
Unit of Account
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Fiat Money
Fiat Money
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Commodity Money
Commodity Money
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Money Supply
Money Supply
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Currency (C)
Currency (C)
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M1
M1
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M2
M2
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Central Bank
Central Bank
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Monetary Base (B)
Monetary Base (B)
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Currency-Deposit Ratio (cr)
Currency-Deposit Ratio (cr)
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Reserve-Deposit Ratio (rr)
Reserve-Deposit Ratio (rr)
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Money Multiplier (m)
Money Multiplier (m)
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Money Creation
Money Creation
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Higher Reserve Requirements
Higher Reserve Requirements
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Money Supply vs. Monetary Base
Money Supply vs. Monetary Base
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Lower Reserve-Deposit Ratio
Lower Reserve-Deposit Ratio
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Lower Currency-Deposit Ratio
Lower Currency-Deposit Ratio
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Reserve Requirement Ratio and Money Multiplier
Reserve Requirement Ratio and Money Multiplier
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Central Bank's Control of Money Supply
Central Bank's Control of Money Supply
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Study Notes
Money and the Monetary System
- Definition of Money: Money is a readily usable asset for transactions.
- Functions of Money:
- Medium of Exchange: Facilitates buying and selling by being commonly accepted.
- Store of Value: Can be saved and held for future use, although its value isn't perfectly stable (affected by inflation).
- Unit of Account: Provides terms for quoting prices and debts.
- Types of Money:
- Fiat Money: Has no intrinsic value, but is ordered by an authority to be accepted as a medium of exchange (legal tender).
- Commodity Money: Has value beyond its use as money (e.g., gold, silver). A gold standard economy uses gold as money.
The Money Supply
- What Counts as Money: The total value of assets usable for transactions (M).
- Currency (physical money)
- Checkable deposits (funds in checking accounts used for transactions) are counted as money due to usability.
- Traveler's checks.
- Measures of Money Supply:
- M1: Includes currency, checkable deposits, and traveler's checks.
- M2: Includes M1 plus other deposits (e.g., small savings, money market mutual funds).
Banks in the Monetary System
- Banks' Role: Banks take deposits, borrow money, and invest capital.
- Money Creation: Loans and investments create money beyond initial deposits.
- Bank Balance Sheet: Reflects assets (reserves, loans, securities) and liabilities (deposits, debt, and capital). Assets = Liabilities + Capital
- Example: If the bank has $200 in reserves, $750 in deposits, $500 in loans, $200 in debt and $300 in securities, $50 in capital.
- Capital: The owners' invested funds.
Central Banks' Influence
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Monetary Base (B): The total currency and reserves.
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B=C+R : Monetary base is the sum of:
- Currency (C), held by the public.
- Reserves (R), held by banks.
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Currency–deposit Ratio (cr): The proportion of deposits held as cash.
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Reserve–deposit Ratio (rr): The proportion of deposits held as reserves.
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Money Multiplier (m):
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The relationship between Monetary Base, Money supply and money multiplier: M = (cr +1) / (cr + rr) * B = m *B; m>1 m = the money multiplier.
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Factors influencing the money supply:
- Changes in the money multiplier (from changes in reserve and currency-deposit ratios).
- Changes in the monetary base (from actions of central banks).
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Central Bank Tools:
- Open Market Operations: Buying and Selling government bonds to influence the money supply.
- Discount Rate: The interest rate charged by the central bank on loans to banks.
- Reserve Requirements: Regulations that dictate the minimum amount of reserves banks must hold, which influences the reserve–deposit ratio.
- Interest on Reserves: Interest paid by the central bank on reserves held by banks. This rate can influence the behavior of banks and the reserve-deposit ratio.
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Relationship between money supply, and monetary policy tools:
- To increase the money supply, a central bank can use open market operations to buy government bonds.
- To decrease the money supply, a central bank can use open market operations to sell government bonds.
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Description
This quiz explores the definition of money and its essential functions in the economy. It covers various types of money, including fiat and commodity money, and discusses the components of the money supply. Test your understanding of these foundational concepts of the monetary system.
