Exam 3 - P. 1
Economics 211 with Filer at Arizona State University - Tempe
About this deck
By: Matthew Liu
Textbook:
Macroeconomics (Text only)
Created: 2012-04-18
Size: 71 flashcards
Views: 175
Textbook:
Macroeconomics (Text only)Created: 2012-04-18
Size: 71 flashcards
Views: 175
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In the 1800s _____ were common in the US
Recessions
What caused the recessions of the 1800s?
Bank Runs
What are bank runs?
When everyone withdraws their money from a bank, causing it to go out of business
What was the purpose of the Aldrich-Vreeland Act?
Legislation to fight bank panics.
It allowed banks to lend money to each other during a crisis
VERY SUCCESSFUL
What was the Federal Reserve Act? Was it successful?
The FRA replaced the Aldrich-Vreeland Act.
NO
Who established the FDIC or Federal Deposit Insurance Corporation?
FDR
Franklin Delanor Roosevelt
What does the Federal Deposit Insurance Corporation (FDIC) do?
It insures up to $250,000 of a person's deposit at a bank
IS the FDIC a success?
YES
What were FDR's 3 MAIN accomplishments, during his first 100 days in office?
1. Established the FDIC
2. Took the US off the gold standard
3. Legalized beer (alcohol)
The Federal Reserve is the ______ ______ of the US
Central Bank
therefore it is the bank of the US government
T/F: Banks must deposit their funds in the Federal Reserve
TRUE.
i.e. Chase, Wells Fargo, etc.
T/F: The federal reserve has three powers.
False!
It has four: open market operations, discount rate, required reserve (reserve requirement ratio), and high-powered money
Define the power of "Open Market Operation"
The Federal Reserve can buy and sell US bonds. (government securities)
What is another name for US bonds?
Government Securities
What are the FR's 4 powers?
Open Market Operations: ability to buy / sell US bonds
Discount Rate: can loan money to other banks (interest = DR)
Required Reserve (RRR): can tell banks how money they must keep at all times
High-powered money: controls amount of money circulating in economy
What is the purpose of the FR (Federal Reserve)?
To:
1. control inflation
2. maintain stable prices
3. grow the economy (full employment)
T/F: There are 10 district banks in the Federal Reserve
FALSE
There are 12 district banks
Explain the structure of each of the FR's district banks
- Each bank has a BoD (Board of Directors)
- Made up of 3 from commercial banks, 3 from nonbanking business, 3 appointed by board
- Each has a president
The Board of Directors of a district bank, has how many directors?
9
(3 from commercial banks, 3 from nonbanking business, 3 appointed by board
What is/does the Board of Governors do?
The BoG "determines the monetary policy"
- It has 7 members
- Chairman is appointed by president / approved by congress
- Chair serves 4 years ; others 14 years
- Current one is Ben Bernanke
What is the FOMC (Federal Open Market Committee)?
It determines the "official policy of the Federal Reserve"
- Has 7 members from the BoG, and 5 district presidents
- President of the NY bank is ALWAYS a part of the FOMC
- The FOMC sells/buys bonds in the OMO
What do we call instructions given from the FOMC to the NY bank?
FOMC Directive
What is the federal funds rate?
This is the interest banks charge when they lend money to another bank.
Banks borrow money from other banks on the Federal Fund Market
Banks borrow money from each other where?
The Federal Funds Market (FFM)
The FR has ______ control over the federal funds rate
INDIRECT
- buying bonds = rate INCREASE
- selling bonds = rate DECREASE
What is the difference between the FFR (Federal Funds Rate) and the DR (Discount Rate)?
FFR = interest charged when banks loan money to other banks
vs.
DR = interest on those same loans
The FR has _____ control over the FFR (Federal Funds Rate)
INDIRECT
- buying bonds = rate DECREASE
- selling bonds = rate INCREASE
T/F: The Federal Reserve (FR) has direct control over the Federal Funds Rate (FFR)
FALSE
The FR has INDIRECT control over the FFR
buying bonds = rate DECREASE
selling bonds = rate INCREASE
What is the difference between the FFR (Federal Funds Rate) and the DR (Discount Rate)?
FFR = interest charged when banks loan money to other banks
vs.
DR = interest on the loans to those banks
What is the difference between the FFM (Federal Funds Market) and the DW (Discount Window)?
FFM = Where the banks borrow money from other banks
vs.
DW = Where the FR loans money to other banks
1920's: It was common for banks to _____ ______ to investors
loan money
From 1929 - 1933, how many banks failed?
9000
From 1929 - 1933, 9000+ banks failed. How come the FR didn't save these banks?
THREE reasons:
1. Feds only lent money to member banks. (membership was expensive / heavily regulated)
2. Feds PICKY about collateral
3. Feds would go on bank holidays. They would just go home
How many reasons are there for why the FR did not save banks during the Great Depression?
Three
1. Bank Membership (exclusive / paid)
2. Picky about collateral
3. Had bank holidays
How could the FR have prevented the Great Depression?
By buying more treasury bonds to INCREASE the money supply
During the Great Depression money supply decreased by _____ %
33%!
Because of the Great Depression, America entered a ______.
recession
From (1929-1933 / 1933-1937) the US started to recover from recession
1933-1937
REMEMBER: 1929-1933 is the GD. Over 9000 banks failed.
What did the FR do from 1936-1937, that sent the US back into recession?
They doubled the reserve requirements for banks (how much money they MUST have at all times).
- Caused recession
- Tried to prevent Americans from spending (to prevent inflation)
Who caused the Great Depression?
Federal Reserve
Hence why the Federal Reserve Act was a failure.
When the FR doubled the reserve requirement they caused what?
Caused the money supply to DECREASE (another) 33%!!
T/F: FOMC controls the money supply of the US.
FALSE
The FR (Federal Reserve) controls the money supply of the US.
- The FOMC = part of the FR that controls the official policy of the FR
When the FR purchases bonds (gov. securities) from Americans it is called ____ ______ ______.
Open Market Purchases
When the FR purchases bonds = INCREASE in money supply. What else happens?
1. Banks will have MORE excess, legal, and required reserves.
2. Interest Rates/FFR will DECREASE
3. Business will have MORE loans as interest rate decreases / Investment spending will INCREASE
4. Investment spending INCREASE = AD INCREASE
Are Open Market Purchase (OPM) and Open Market Sales (OPS) the same thing?
NO. not at all.
OPM = FR buying bonds from Americans
OPS = FR selling bonds to Americans
What happens as the money supply DECREASES?
(think opposite of increasing)
1. Banks will have FEWER excess, legal, and required reserves
2. Interest rates / FFR will INCREASE
3. Business have FEWER loans
4. Investment spending DECREASES / AD DECREASES
When the FR makes OMP (Open Market Purchases) it is hoped that people will do what with their new money?
DEPOSIT it in the BANK
FR buys bonds = people receiving money
Reminder: AS or AD slopes upwards?
AS (AGGREGATE SUPPLY)
REMEMBER: The vertical part is called LRAS (Long Run Aggregate Supply)
LRAS = Full ______
Employment!
Remember: it's the vertical part
T/F: Money supply has a BIG EFFECT on LRAS, AS, and Full Employment.
FALSE!!
Money supply will NEVER SHIFT: Aggregate Supply, Long-Run Aggregate Supply, or Full Employment
T/F: Money Supply can affect AD (Aggregate Demand)?
TRUE.
It can shift the AD
- MS INCREASE = AD shift RIGHT
- This is INFLATION
Does an increase in money supply affect an economy differently if it is on the LRAS?
YES
- IF OFF the LRAS, it will cause: INCREASE in price levels / INCREASE in Real GDP
- IF ON the LRAS, it will cause:
INCREASE in price levels / NO CHANGE in Real GDP
How does Money Supply affect the AD?
If it INCREASES = shift right on the AD (inflation)
If it DECREASES = shift left on the AD (deflation)
IF the economy is on the LRAS, will a decrease in money supply cause it to come off the LRAS?
Possibly.
Can cause one of TWO things:
1. Economy will come off LRAS (decrease in both price lvl / real gdp)
2. Economy will stay on LRAS (decrease in price lvl / no change for real gdp)
What is the equation for the "Quantity Theory of Money" (QTM)
MV = Py = (nominal GDP)
M = Money Supply
V = Velocity (# of times each dollar is spent each year)
P = Price Level (inflation / deflation)
y = Real GDP (or real output)
*** # of times money is spent = nominal GDP of country
The QTM (Quantum Theory of Money) also equals the ______ GDP
Nominal
MV = Py
The "V" in the QTM equation stands for...? What does it mean?
Velocity
- This is the # of times each dollar is spent in the economy each year
Using the QTM, HOW would you find the Real GDP?
Remember the equation is MV = Py
y = Real GDP
QTM: When dealing with percentages, what equation do we use?
DON'T USE MV = Py
USE: M%+V% = P%+y%
QTM: Money supply increases by 40%, Velocity decreases by 35%. Does the Nominal GDP Increase OR Decrease? What is the new Nom. GDP?
M%+V%=P%+y%
40% - 35% = 5%
INCREASES
Nom. GDP = 5%
What was Zimbabwe suffering from until 2008?
Hyper-Inflation
In Zimbabwe the inflation is greater than what percentage?
Inflation > 1 billion %
What caused Zimbabwe's hyper inflation?
1. Money supply kept increasing (Velocity / Real GDP remained CONSTANT)
2. Price Levels kept increasing
What is the official currency of Zimbabwe today?
The US dollar
As inflation increases, what happens to money?
Increasing inflation = decreasing power / purpose
Balance Sheet has how many columns/what are they?
TWO.
1. Assets (generates revenue / money for bank)
2. Liabilities (What is owed to other banks, FR, and customers)
What does DD stand for?
Demand Deposit
This is a deposit a person makes at a bank
What are reserves?
Money and cash in a bank's possession
Of a bank's reserves, what is the money called that the bank carries directly in its facilities?
Vault Cash
Balance Sheet: What are the Legal Reserves (LR)?
This is the total amount of money a bank has.
T/F: Bank Assets = Bank Liabilities
TRUE!
ALWAYS!!
About this deck
By: Matthew Liu
Textbook: Macroeconomics (Text only)
Created: 2012-04-18
Size: 71 flashcards
Views: 175
Textbook:
Macroeconomics (Text only)Created: 2012-04-18
Size: 71 flashcards
Views: 175
About StudyBlue
STUDYBLUE makes things that make you better at school.
Things like online flashcards with photos and audio.
Things like personalized quizzes and friendly reminders about when (and what) to study next.
Think of it as a digital backpack™: access to all of your study materials online and on your phone.
STUDYBLUE exists to make studying efficient and effective for every student, for free. Join us.
“I have used this website for three exams, and I see a huge difference in my test results.”
Naj
Naj