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Chapter 5

Chapter 5. Money and the Federal Reserve. These slides supplement the textbook, but should not replace reading the textbook. What is barter?. The practice of trading one good or service for another. What is a double coincidence of wants?.

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Chapter 5

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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? • No, they only do business with financial institutions

  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. Why are some banks not members of Federal Reserve? • High minimum capital requirements • Restrictions & regulations • Can use Fed’s major facilities anyway

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

  43. When was the FDIC established? • 1933

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

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

  46. What is the Full Employment and Balanced Growth Act of 1978? • Among other things the Federal Reserve was mandated to do everything in its authority to achieve full employment and stable prices

  47. What was theGlass-Steagall Act of 1932? • Separated depository banks from Wall Street investment banks, it regulated the commercial banks but not the investment banks

  48. What was theFinancial Services Modernization Act of 1999? • Because of lobbying efforts of Citigroup and other large banks who wanted to underwrite and trade financial instruments such as collateralized debt obligations the Glass-Steagall Act was repealed

  49. What is a Collateralized Debt Obligation? • A CDO is an structured asset backed security whose value and payments are derived from a portfolio of fixed income underlying assets, such as mortgages

  50. How does a CDO work? • A CDO is a promise to pay cash flows to investors in a prescribed sequence, based on how much the CDO collects from the pool of assets, the higher tranches first and the lower tranches last

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