final study guide - I. Monetary Policy: How it works...

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I. Monetary Policy: How it works according to Keynesian Theory a. How should the money supply be defined and measured? i. Money supply: the amount of value of money in the United States at any given point in time. ii. Measured as the total of M1 (transactions money: money that can be used directly for transaction) + saving accounts + money market accounts + other near monies (close substitutes for transactions money, such as saving accounts and money market accounts) 1. M1 = currency held outside banks + demand deposits + traveler’s checks + other checkable deposits 2. This is equal to M2 b. What is a fractional-reserve banking system? How does such a system create money? i. Banks that don’t have to hold all the money at once ii. Banks receive deposits from customers, making loans as well as buy securities iii. By buying securities, they can charge an interest rate and make money c. What is the relationship between the multiplier of Keynesian income analysis (developed in section D) and the total multiple expansion in the money supply produced by a fractional-reserve banking system? i. Money multiplier: 1/required reserve ratio d. What is the difference between a central bank and a private bank? i. Central bank: an entity responsible for the monetary policy of its country or of a group of member states. Its primary responsibility is to maintain the stability of the national currency and money supply, but more active duties include controlling subsidized-loan interest rates, and acting as a "bailout" lender of last resort to the banking sector during times of financial crisis (private banks often being integral to the national financial system). It may also have supervisory powers, to ensure that banks and other financial institutions do not behave recklessly or fraudulently; also the private bank’s bank ii. Private: banks that are not incorporated. A non-incorporated bank is owned by either an individual or a general partner(s) with limited partner(s). e. What are the assets, liabilities, and reserves of a private bank? i. Assets – liabilities = net worth ii. Assets: things that a firm owns that are worth something. For a bank, these assets include the bank building, its furniture, its holdings of government securities, cash in its vaults, bonds, stocks, and so forth iii. Liabilities: debts, what it owes; deposits are a banks most important liabilities; deposits are debts owed to the depositors iv. Reserves: the deposits that a bank has made at the Fed and its cash on hand; a bank can go to the Fed and get cash for them, just like
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the way we get money from the bank (withdrawing from our deposits) f. What is the difference between the items on the balance sheet of a Federal Reserve Bank and those on the balance sheet of a private bank? i.
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final study guide - I. Monetary Policy: How it works...

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