Functions of Money
The three primary functions of money are...
Medium of exchange, unit of account, store of value
The nickname for the Federal Reserve
The Fed
Money without intrinsic value that is established as money by government decree.
What is fractional-reserve banking?
A system where banks keep a fraction of deposits as reserves and lend out the rest.
What was the main cause of the 2008 financial crisis?
The collapse of mortgage-backed securities tied to subprime mortgages
Two kinds of money are
Commodity, Fiat
When the Federal Reserve was created
1913
One example of commodity money:
Gold
What is the reserve ratio, and how does it influence the money supply?
The fraction of total deposits that a bank holds as reserves. A lower reserve ratio increases the money supply, while a higher ratio decreases it.
What role did mortgage-backed securities play in the financial crisis?
Their collapse led to significant bank losses and a credit crunch
The term that describes the ease with which an asset can be converted into the economy’s medium of exchange is
Liquidity
The Federal Open Market Committee’s primary tool for controlling the money supply is
Open-market operations (buying and selling government bonds)
What are reserves?
Deposits that banks have not loaned out and are held to meet withdrawal requests
What happens to the money supply when banks lend out reserves?
It increases.
How did the Fed use the discount rate to stabilize the banking system in 2008?
By lowering the discount rate to encourage borrowing and increase bank reserves
The majority of money circulating in the U.S. is held by
Criminals
Two main jobs of the Federal Reserve
Regulating banks and ensuring the health of the financial system, and controlling the money supply
What is leverage in banking, and why can it be risky?
Banks borrow money to make bigger investments (for higher profits), but if the value of the investments drop, the bank may not be able to pay back their liabilities.
What is a bank run, and how does the FDIC prevent them?
A bank run occurs when depositors rush to withdraw funds; the FDIC prevents this by insuring deposits and boosting depositor confidence.
What is the purpose of the Federal Deposit Insurance Corporation (FDIC)?
To insure bank deposits and stabilize the banking system by preventing mass withdrawals
Crypto is a new form of digital currency. It holds no intrinsic value, but crypto like Bitcoin is currently worth thousands of dollars. People like it because
it exists apart from the government - it is anonymous
During a financial crisis, the Federal Reserve provide stability to banks and the economy by
Lending money to banks through the discount window or emergency liquidity measures
How did the U.S. government stabilize banks during the 2008 financial crisis
By injecting public funds to recapitalize banks and restore lending.
How is it reserve ratio regulated?
The fraction of deposits to a bank is held as reserves, regulated by the Federal Reserve through reserve requirements
Why does the Fed face challenges in controlling the money supply?
Unpredictable depositor and bank lending behaviors make precise control difficult.