REF CH 2

• MONEY


  is that it consists of those assets which have immediate purchasing power
• Money could include

  savings accounts, money market funds, certain bonds, and other financial instruments
• Two commonly used definitions of money from the Federal Reserve

  M1 and M2
• M1


  is defined as the sum of currency held by the public and transaction deposits at depository institutions (which are financial institutions that obtain their funds mainly through deposits from the public, such as commercial banks, savings and loan associations, savings banks, and credit unions)
• M2


  is defined as M1 plus savings deposits, small-denomination time deposits (those issued in amounts of less than $100,000), and retail money market mutual fund shares.
• The economic health of the United States is affected by government policies in two ways:

  Monetary policy AND Fiscal policy
• Monetary policy


  which is the maintenance of a stable money supply that provides economic growth while keeping inflation in check. The Federal Reserve is responsible for monetary policy in the United States
• Fiscal 


  Which relates to Federal Government spending, which must be approved by the U.S. Congress. The U.S. Treasury is responsible for raising money to support the spending decisions of Congress.
• At the treasury level, funds can be raised to pay for government spending by:

  Raising taxes AND Increasing borrowing
• Federal Reserve (The Fed)


  is the central banking system of the United States. The Federal Reserve’s most critical role is to keep the economy healthy through the proper application of monetary policy. The objective of monetary policy is to influence the country’s economic performance in order to promote stable prices, maximum sustainable employment, and steady economic growth.
• Monetary inflation


  When there is an excess supply of money in the market
• There are different types of inflation

  Demand-pull inflation AND Cost-push inflation
• Demand-pull inflation


  is created when there is more money in the market and fewer goods for sale.
• Cost push inflation

  occurs when the costs of production and offering services increase, thereby causing manufacturers and tradespeople/vendors to raise their prices accordingly. The costs are then passed on to the consumer
• The Fed uses three primary monetary policy tools to influence the cost and availability of credit:

  Open market operations

  The discount rate

  Reserve requirements
• Open market operations


  The Fed’s most flexible and often-used tool of monetary policy for buying or selling government securities
• Discount Rate 


  is the interest rate a Reserve Bank charges eligible financial institutions to borrow funds on a short-term basis
• Federal Funds Rate


  is the rate that the Federal Reserve charges banks for unsecured loans, most of which are for a very short term (sometimes overnight). Banks use these short-term loans to meet their liquidity requirements when withdrawals threaten to exceed cash on hand.
• Reserve requirements


  The Federal Reserve sets these for all commercial banks, savings banks, savings and loans, credit unions, and U.S. branches and agencies of foreign banks
• United States Treasury


  is primarily responsible for raising funds to finance the operations of the United States Government. While the Federal Reserve is responsible for the nation’s monetary policy, the Treasury’s primary mission is to manage fiscal policy.
• Department of the Treasury is organized into two major components

  the departmental offices and the operating bureaus
• Troubled Asset Relief Program (TARP)


  was created to restore the nation’s financial stability and restart economic growth.
• Office of the Comptroller of the Currency (OCC)


  charters, regulates, and supervises all national banks, federal savings associations, and federal branches and agencies of foreign banks.
• Federal Deposit Insurance Corporation (FDIC)


  preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for up to $250,000, by identifying, monitoring, and addressing risks to the deposit insurance funds, and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.
• The Twelve Federal Home Loan Banks


  are a system of regional banks from which local lending institutions everywhere in America borrow funds to finance housing, economic development, infrastructure, and jobs.
• INTERNAL REVENUE SERVICE


  is organized to carry out the responsibilities of the Secretary of the Treasury under section 7801 of the Internal Revenue Code