Chapter 30 – Money, Banking and the Federal Reserve System – page 1
Funny Money (p. 797) Who is hurt most by counterfeit money? Why? _________________
_____________________________________________________________________________
Definition of money - __________________________________________________________
The narrow definition of money includes ____________________________________________
These assets are ___________. Assets that are “almost” checkable – like ___________________
are also part of the money supply. These assets are only slightly less ______________________.
Why is money essential to a free market economy? ____________________________________
_____________________________________________________________________________
Roles of Money: Money plays three important roles in the economy. Describe them:
Medium of exchange ___________________________________________________________
Store of value _________________________________________________________________
Unit of account ________________________________________________________________
Types of Money: Define the terms that track the evolution of money over time.
Commodity money _____________________________________________________________
Commodity-backed money _______________________________________________________
Fiat money ___________________________________________________________________
What is the biggest advantage of fiat money? _________________________________________
_______________the biggest risk? _________________________________________________
Measuring the Money Supply: List the assets included in the following:
M1 _________________________________________________________________________
M2 _________________________________________________________________________
Which is greater, M1 or M2? _____ Is M1 included in M2? _______ Why would people hold
there money as M1 over M2? ____________________________________________________
How much currency is in circulation in the U.S.? ________________________ Where is most
of it? ________________________________________________________________________
When did the U.S. finally break its currency from gold for good?______ Was it a disaster? ____
CYU 30-1 1. __________________________________________________________________
2. ___________________________________________________________________________
3. ___________________________________________________________________________
Problem 1. (p. 827) a. _________ b. __________ c. __________ d. __________ e. __________
2. a. _________________ b. ________________ c. ________________ d. ________________
4. a. ____________ b. _____________ c. _____________ d. _____________ e. ____________
The Monetary Role of Banks
What Banks Do How do banks create liquidity? ___________________________________
______________________________________________________________ This is important.
What are bank reserves? ________________________________________________________
Are bank reserves part of currency in circulation? _______ In a simplified T account, what are a
bank’s assets? ______________________________ What are its liabilities? ________________
What is the reserve ratio? ________________________________________________________
__________________________ Who sets the reserve ratio? ____________________________
The Problem of Bank Runs What is a bank run? ________________________________
_______________________________________ Why are the contagious? ________________
__________________________________________________________________ Why do they
inevitably lead to bank failure? ____________________________________________________
_____________________________________________________________________________
Bank Regulation How do the following government regulations prevent banks runs? Define.
Deposit Insurance ______________________________________________________________
Capital Requirements ___________________________________________________________
____________________________ Reserve Requirements ______________________________
_____________________________________________________________________________
The Discount Window __________________________________________________________
CYU 30-2 1. __________________________________________________________________
2. ___________________________________________________________________________
_____________________________________________________________________________
Chapter 30 – Money, Banking and the Federal Reserve System – page 2
Determining the Money Supply: How do banks “create money”? ___________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
When we learned about the multiplier effect, the marginal propensity to save (MPS) was money
that was not spent. What is the term for money that is not loaned by a bank? _______________
In determining the money multiplier, we assume that all money disbursed as loans is
_____________________ back into the banks. We also assume a fixed reserve ratio of ______.
What is the money multiplier given these conditions? __________________________________
The Money Multiplier in Reality What is the monetary base? _____________________
_____________________________________________________________________________
How is it different from the money supply? __________________________________________
_____________________________________________________________________________
What is the actual money multiplier in our economy? ______ Why is it so much lower than 10?
_____________________________________________________________________________
CYU 30-3 1. __________________________________________________________________
_____________________________________________________________________________
2. ___________________________________________________________________________
Complete the following problems on page 828.
5.
6.
7.
The Federal Reserve System How is the Fed structured? __________________________
_____________________________________________________________________________
Define the federal funds market _______________________________________________
the federal funds rate ________________________________________________________
the discount rate _____________________________________________________________
What two tools of altering money supply does the Federal Reserve not use? _________________
_____________________________________________________________________________
What is the Fed doing when it conducts open-market operations? _____________________
_____________________________________________________________________________
How does this method of controlling the money supply indirectly affect interest rates?
_____________________________________________________________________________
_____________________________________________________________________________
What happened to the Fed’s balance sheet in 2008? Why? ______________________________
_____________________________________________________________________________
CYU 30-4 1. __________________________________________________________________
_____________________________________________________________________________
Problems 9.
12.
13.
Chapter 30 – Money, Banking and the Federal Reserve System – page 3
An Overview of the Twenty-First Century American Banking System
How was the American banking system designed prior to the Federal Reserve? What was the
problem with this arrangement? ___________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
What conditions triggered the Panic of 1907? What lessons were learned from the crisis?
_____________________________________________________________________________
_____________________________________________________________________________
Why was the Federal Reserve Bank created? Also, respond to CYU 30-5, question 2.
_____________________________________________________________________________
_____________________________________________________________________________
What was the Glass-Steagall Act of 1933? ___________________________________________
_____________________________________________________________________________
What was Regulation Q? ________________________________________________________
Describe the S&L crisis of the 1970s and 1980s. ______________________________________
_____________________________________________________________________________
Use the story of LTCM to describe the terms leverage, balance sheet effect, and vicious cycle of
deleveraging. __________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
How did subprime lending and securitization lead to the Housing Crisis of 2008? ____________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
What was the Fed’s response? ____________________________________________________
_____________________________________________________________________________
CYU 30-5, 1. __________________________________________________________________
3. ___________________________________________________________________________
Chapter 30 Review Terms
Money
defined
3 functions of money
Liquidity/Illiquidity
- medium of exchange, unit of account, store of value
The monetary aggregates, M1 & M2, what is in each? Which is bigger?
The difference between money (M1) and near-money (M2)
commodity, commodity-backed, and fiat money
Bank reserves – Why? Are they in the money supply? Where are they kept?
Bank assets
Bank liabilities
Bank Regulations and their purpose:
Reserve Ratio
Capital Requirements
Deposit Insurance
The Discount Window
Bank Runs
The Money Multiplier
Excess Reserves
Reserves and the Money Multiplier
Look for: How much money is created? Vs. How much is in the money supply?
The purpose of the Federal Reserve
Open Market Operations
The federal funds rate vs. the discount rate
U.S. Treasury Bills
How does the Fed control the money supply?
Securitization
Cycle of deleveraging
Balance Sheet Effect
Subprime lending