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Money & Federal Reserve System

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  1. Chapter 5 • Money and the Federal Reserve • These slides supplement the textbook, but should not replace reading the textbook

  2. What is barter? • The practice of trading one good or service for another

  3. What is a double coincidence of wants? • A situation in which two traders are willing to exchange their products directly

  4. What is currency? • Anything that can be used to signify someone’s credit and someone’s debit in a financial transaction

  5. What are the 4 basic functions of money? • Medium of exchange • Unit of account • Store of value • Standard deferred payment

  6. What is amedium of exchange? • Money is accepted in exchange for a good or service

  7. What aunit of account? • Money is used to compare the relative value of different goods and services

  8. What is astore of value? • Money is used as a means of saving

  9. What is astandard ofdeferred payment? • Money is used to keep track of the method and the amount of money is to be paid back in the future

  10. What are the properties of money? • Scarcity • Portability • Divisibility

  11. What is commodity money? • Anything that serves both as money and as a commodity

  12. What is token money? • Money that exceeds the value from which it was made, for example, quarters

  13. What are examples of money? • Federal Reserve Notes • Coins • Checks • Travelers checks

  14. What does the term liquidity mean? • The easier something is to spend the more liquid it is, the more difficult it is to spend the less liquid it is

  15. Which form of money is most liquid? • It all depends on the circumstances

  16. What is fiat money? • Money not redeemable for any commodity; its status as money is conferred by the government

  17. What is legal tender? • Currency that constitutes a valid and legal offer of payment for debts

  18. Does gold or silver back up our money? • No, our money is not backed up by anything

  19. What happenedin 1968? • U.S and a number of European nations stopped selling gold on the London market, allowing the market to freely determine the price of gold

  20. What happenedin 1971? • From 1968 to 1971, only central banks could trade with the U.S. at $35/oz. Finally, in 1971, even this bit of gold convertibility died

  21. Why does money have value? • It is useful and relatively scarce

  22. What determines the value of money? • The general price level

  23. Why are banks called depository institutions? • Because they accept deposits from the public

  24. What arecommercial banks? • Depository institutions that make loans to the public

  25. What aredemand deposits? • Accounts at financial institutions that pay no interest and on which depositors can write checks to obtain their deposits

  26. How do banks make profit? • After interest paid or services rendered minus costs equals bank’s profit

  27. Who were the first bankers? • Goldsmiths in the middle ages

  28. What is the Federal Reserve System? • The central bank and monetary authority of the United States; known as “the Fed”

  29. What is the function of the Fed? • To ensure the availability of enough money and credit in the banking system to support a growing economy

  30. When was the federal reserve system established? • The Federal Reserve Act of 1913

  31. Does the Fed loan money to private companies? • Yes, after 2008, it bought bonds from companies as well as the federal government and banks

  32. Why would the Fed want to decrease the money supply? • To lower inflation

  33. Why would the Fed want to increase the money supply? • To stimulate employment

  34. How many Federal Reserve banks are there? • The U. S. is divided into 12 Federal Reserve districts, each district has a Federal Reserve Bank

  35. Who makes the decisions for the Federal Reserve? • The Board of Governors and the Open Market Committee

  36. How long do most board members serve? • 14 years, after which they cannot serve again

  37. How long does the chairman of the board serve? • The Chairman serves 4 years, but can serve again

  38. What is the Federal Open Market Committee? • Made up of the 7 board members and 5 presidents of Federal Reserve Banks

  39. What is the role of the Federal Open Market Committee? • The FOMC makes decisions as to the buying and selling of government securities

  40. Member Banks • owns stock in Federal Reserve • only national banks are required to be members

  41. What do the letters FDIC stand for? • The Federal Deposit Insurance Corporation

  42. When was the FDIC established? • 1933

  43. What is the function of the FDIC? • To ensure deposits in any banking institution that purchases FDIC insurance

  44. How much are deposits insured for? • Each account in a bank is insured up to $250,000 per depositor per bank

  45. What is the name of the market where money is bought and sold? • The loanable funds market

  46. Why would the Fed want to expand the money supply? • If we have unemployment the Fed wants to increase the money supply to stimulate employment

  47. Why would the Fed want to contract the money supply? • If we have inflation the Fed wants to decrease the money supply to bring down prices

  48. What does the term liquidity mean? • A measure of the ease with which an asset can be converted into money without significant loss in its value

  49. What does liquidity have to do with the money supply? • With inflation the Fed wants banks to be lessliquid • With unemployment the Fed wants banks to be moreliquid

  50. What makes a bank more or less liquid? • A lot of cash in excess reserves - very liquid • Little cash in excess reserves - less liquid

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