Macro: Ch 32- Money, Banking, and Financial Institutions

medium of exchange
Any item sellers generally accept and buyers generally use to pay for a good or service; money; a convenient means of exchanging goods and services without engaging in barter.

unit of account
A standard unit in which prices can be stated and the value of goods and services can be compared; one of the three functions of money.

store of value
An asset set aside for future use; one of the three functions of money.

Spendability; the more liquid an asset, the more quickly it can be converted into cash and used for either purchases of goods and services or purchases of other assets.

The narrowest definition of the U.S. money supply. Consists of two components:
– Currency (coins and paper money) in the hands of the public.
– All checkable deposits (all deposits in commercial banks and “thrift” or savings institutions on which checks of any size can be drawn).

Federal Reserve Notes
Paper money issued by Federal Reserve System (U.S. central bank).

token money
The face value of any piece of currency is unrelated to its intrinsic value – the value of the physical material (metal or paper and ink) out of which that piece of currency is constructed.

checkable deposits
NOW Deposits (negotiable order of withdrawal).
Money, M1 = currency + checkable deposits

commercial banks
The primary depository institutions.

thrift institutions
Savings and loan associations (S&Ls), mutual savings banks, and credit unions.

Highly liquid financial assets that do not function directly or fully as a medium of exchange but can be readily converted into currency or checkable deposits.

Includes three categories:
– savings deposits, including money market deposit accounts
– small-denominated (less that $100,000) time deposits
– money market mutual funds held by individuals
Money, M2 = M1 + savings deposits, including MMDAs + small-denominated (less that $100,000) time deposits + MMMFs held by individuals

savings account
A deposit in a commercial bank or thrift institution on which interest payments are received; generally used for saving rather than daily transactions; a component of the M2 money supply.

money market deposit account (MMDA)
Interest-bearing accounts offered by commercial banks and thrift institutions that invest deposited funs into a variety of short-term securities. Depositors may write checks against their balances, but there are minimum-balance requirements as well as limits on the frequency of check writing and withdrawals.

time deposits
An interest-earning deposit in a commercial bank or thrift institution that the depositor can withdraw without penalty after the end of a specified period.

money market mutual fund (MMMF)
Mutual funds that invest in short-term securities. Depositors can write checks in minimum amounts or more against their accounts

legal tender
Paper money is a valid and legal means of payment of any debt that was contracted in dollars.

Federal Reserve System
The U.S. central bank, consisting of the Board of Governors of the Federal Reserve and the 12 Federal Reserve Banks, which controls the lending activity of the nation’s banks and thrifts and thus the money supply; commonly referred to as the “Fed.”
Monetary authority who controls the Money Supply (MS) for our country.

Board of Governors
The “monetary authorities” of the Federal Reserve System who direct the 12 Federal Reserve Banks. The central authority of the U.S. money and banking system.
Serves as the central authority; 7 Board Members appointed by US President.

Federal Reserve Banks
Blend private and public control; collectively serve as the nation’s “central bank.” These banks also serve as bankers’ banks.

Federal Open Market Committee (FOMC)
Aids the Board of Governors in conducting monetary policy. Made up of 12 individuals:
– The seven members of the Board of Governors
– The president of the New York Federal Reserve Bank
– Four of the remaining presidents of Federal Reserve Banks on a 1-year rotating basis.

subprime mortgage loans
High-interest-rate loans to homey buyers with higher-than-average credit risk.

mortgage-backed securities
Bonds backed by mortgage payments.

The process of slicing up and bundling groups of loans, mortgages, corporate bonds, or other financial debts into distinct new securities.

Troubled Asset Relief Program (TARP)
Passed by Congress in 2008 to try to save the financial institutions adversely affected by the crisis. Allocated $700 billion to make emergency loans to critical financial and other U.S. firms.

moral hazard
The tendency for financial investors and financial services firms to take on greater risk because they assume they are at least partially insured against losses.

financial services industry
Major categories include:
Commercial Banks, Thrifts, Insurance Companies, Mutual Fund Companies, Pension Funds, Securities Firms, and Investment Banks

Wall Street Reform and Consumer Protection Act
Passed by Congress in mid-2010 and signed by the president. The law that gave authority to the Federal Reserve System (the Fed) to regulate large financial institutions, created an oversight council to look for growing risk to the financial system, established a process for the federal government to sell off the assets or large failing financial institutions, provided federal regulatory oversight of asset-backed securities, and created a financial consumer protection bureau within the Fed.

LearnSmart Chapter 32

How did subprime mortgage loans contribute to the global financial crisis of 2007 and 2008?
Investment companies borrowed money from banks to buy subprime loans; Banks were indirect investors in subprime loans; Banks had to reduce their reserves as they wrote off bad loans

Which of the following plays a critical role in maintaining the purchasing power of the dollar?
The Federal Reserve

Match the type of financial institution with the correct description of its activities:
Commercial banks
Insurance companies
Mutual Fund Companies
Pension Funds
Securities Firms
Investment Banks
Table 32.1, Pg 726

How did mortgage-backed securities contribute to the financial crisis of 2007 & 2008?
Banks lost money on mortgages they still held.
Banks lost money from loans to investment firms who bought mortgage-backed securities.

The Federal Reserve Bank sets _______ which are the fractions of checking account balances that banks must maintain as currency reserves.
reserve requirements

In 1999, when Congress ended the Depression-era prohibition against banks selling stocks, bonds, and mutual funds, the impact to the financial services industry was:
Banks offering more services; The evolution of larger firms; Fewer firms

Homework Problems Chapter 32

What are the three basic functions of money?
A medium of exchange, a unit of account, and store of value

Rapid inflation can undermine money’s ability to perform its functions.

For example, in runaway inflation:

People revert to barter because money fails as a medium of exchange.

Which two of the following financial institutions offer checkable deposits included within the M1 money supply:
Commercial banks
Thrift institutions

Which of the following items is not included in either M1 or M2:
Currency held in banks

What are the components of the M1 money supply?
Currency in circulation and checkable deposits

What is the largest component of M1?

Which of the components of M1 is legal tender?

The face value of a coin is greater than its intrinsic value because
otherwise people would sell it for its intrinsic value.

What near-monies are included in M2 money supply?
Noncheckable savings deposits, money market deposit accounts, small time deposits, and money market mutual fund balances

Which of the following statements is true?
There is no concrete backing to the money supply in the United States.

The value of money is determined by
people’s willingness to accept it in exchange for goods and services.

The purchasing power of money is
inversely related to the price level.

Who in the U.S. is responsible for maintaining money’s purchasing power?
The Board of Governors of the Federal Reserve System

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