Econ Ch 10 Asset things a firm owns that are worth something For a bank these assets include the building its furniture its holdings of government securities cash in its vaults bonds stocks and etc Liabilities a firm s liabilities are its debts A bank s liabilities are the promises to pay that it has issues Barter direct exchange of goods and services for other goods and services Barter system requires a double coincidence of wants for trade to take place Commodity monies are items such as gold that could be used as money Fiat or token money is money that is worthless Currency debasement is the decrease in the value of money that occurs when its supply is increased rapidly M2 broad money includes money assets in M1 and also slightly less liquid near money assets M1 transactions money consists of currency held outside the bank demand deposits checking accounts travelers checks and other checkable deposits Near monies assets that cannot be used for transactions directly but are nonetheless very liquid That is they can be quickly and easily converted to money without loss of value Ex saving accounts money market accounts Financial Intermediary The bank is acting as a link between people who have funds to lend and those who need to borrow To increase the money supply the central bank can lower the discount rate buy government securities or lower the required reserve ratio To decrease the money supply the central bank can raise the discount rate sell government securities or raise the required reserve ratio To increase the money supply the central bank creates additional reserves by lowering the discount rate buying government securities or lowering the required reserve ratio To decrease the money supply the central bank creates additional reserves by raising the discount rate selling government securities or raising the required reserve ratio Required reserve ratio the percentage of its total deposits that a bank must keep as reserves at the Federal Reserve Excess reserves the difference between a bank s actual reserve and its required reserves Federal Open Market Committee sets goals concerning the money supply and interest rates and directs the operation of the Open Market Desk in New York FOMC sets goals concerning the money supply and interest rates and it directs the Open Market Desk in the New York Federal Reserve Bank to buy and or sell government securities Lender of last resort the Fed provides funds to troubled banks that cannot find any other sources of funds Discount rate is the interest rate that banks pay to the Fed top borrow from it Federal Reserve Bank The central bank of the United States Reserves are the deposits that a bank has at the Feds plus its cash on hand FOMC consists of 12 voting members Board of Governors the most important group within the Feds and it plays a key role in setting monetary policy Seven of 12 FOMC voting members 4 of the 12 presidents of the Federal Reserve district banks vote on a rotating basis The New York Federal Reserve Bank is so important to our financial system that the president of the NY Fed always gets to vote on monetary policy Moral suasion is the pressure that was exerted in the past by the Fed on member banks to discourage them from borrowing heavily Open market operations purchase sale by the Fed of government securities in the open market tool used to expand or contract the amount of reserves in the system and thus the money supply