Term
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Definition
| the amount of $ demanded by individuals, businesses, etc |
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Term
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Definition
| the amount of money in circulation |
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Term
| Who controls the money supply? |
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Definition
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Term
| What is the price of money? |
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Definition
| the opportunity cost of holding money; interest rates |
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Term
| Without money individuals would need to _____ |
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Definition
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Term
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Definition
| requires a double coincidence of wants |
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Term
| What is a double coincidence of wants? |
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Definition
| 2 people have to want each others goods or services |
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Term
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Definition
1. Medium of exchange
2. Unit of account
3. Store of value |
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Term
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Definition
| An item buyers give to sellers when they want to purchase goods and services |
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Term
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Definition
A measurement people use to post prices and record debt
- dollars |
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Term
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Definition
| An item people can use to transfer purchasing power from the present to the future |
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Term
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Definition
It takes the form of a commodity
ex: gold coins |
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Term
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Definition
It takes the form of a commodity
ex: gold coins |
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Term
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Definition
It is money without intrinsic value, used as money because of the government decree
- ex: U.S. dollar |
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Term
| 2 components of the money supply |
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Definition
1. currency
2. checkable deposits |
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Term
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Definition
| paper bills and coins in the hands of the public |
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Term
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Definition
| balances in bank accounts that depositors can access on demand by writing a check |
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Term
| But currency is deposited into a savings accounts, you changed the _______ |
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Definition
| amount of money in circulation |
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Term
| When depositing money into a checking account, you change the _________ |
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Definition
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Term
| 3 reasons why money is valuable |
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Definition
1. acceptability
2. legal tender
3. relative scarcity |
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Term
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Definition
| Money used as a medium of exchange |
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Term
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Definition
| Money people want to hold as a store of value |
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Term
| Equation for total money demand |
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Definition
| TMD = Asset + Transaction |
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Term
| The central bank of the US is _____ |
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Definition
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Term
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Definition
| An institution that oversees the banking system and regulates the money supply |
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Term
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Definition
| The setting of the money supply by policymakers in the central bank |
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Term
| Who decides the monetary policy? |
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Definition
| Federal Open Market Committee (FOMC) |
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Term
| The Federal Reserve Banks are a blend of private and public control called ? |
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Definition
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Term
| Which regional bank are we a part of? |
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Definition
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Term
| Federal Reserve Functions |
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Definition
1. issue currency
2. set reserve requirements
3. lend money to banks
4. collect checks
5. acts as a fiscal agent for the US Gov
6. supervise banks
7. control the money supply |
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Term
| The Fractional Reserve System |
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Definition
| Banks kept a fraction of deposits on reserve and use the rest to make loans |
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Term
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Definition
| Stored gld and gave a receipt |
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Term
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Definition
| Fraction of deposits that banks hold as reserves |
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Term
| Components of a Bank Balance Sheet |
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Definition
1. Assets
2. Liabilities
3. Net Worth - Stock Shares |
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Term
| What is an asset of the bank? |
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Definition
| Cash, property, reserves, loans |
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Term
| What is a liability of the bank? |
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Definition
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Term
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Definition
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Term
| Equation for Reserve Ratio |
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Definition
| Reserve Ratio = commercial bank's required reserves / commercial bank's checkable-deposit liabilities |
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Term
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Definition
| actual reserves - require reserves |
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Term
| Require reserves equation |
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Definition
| checkable deposits x reserve ratio |
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Term
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Definition
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Term
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Definition
| Assets = Liabilities + Net Worth |
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Term
| Multiple - deposit Expansion |
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Definition
| as the loan money is deposited into other accounts, banks will use that money to create more money |
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Term
| Assumptions for multiple-deposit expansion |
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Definition
- 20% require reserves
- all banks have no excess reserves |
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Term
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Definition
| The amount of money the banking system generates with each dollar of reserves |
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Term
| Money Multiplier Equation |
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Definition
1 / Required reserve ratio = 1 / R
- the higher the reserve ratio, the lower the money multiplier |
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Term
| What does the FOMC (Federal Open Market Committee) discuss when they meet? |
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Definition
| discuss the state of the economy and implement monetary policy |
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Term
| Federal Reserve Independence was established by who and why? |
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Definition
| Congress; protects the Fed from political pressure |
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Term
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Definition
| currency and checkable deposits |
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Term
| What are the 2 conflicting mandates when discussing unemployment and inflation? |
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Definition
1. Keep unemployment low
2. Keep inflation low |
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Term
| When there is more money, business are able to take out loans and expand production - lead to ______ inflation |
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Definition
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Term
| When there is less money, it is difficult for businesses and individuals to take out loans, but this leads to ______ inflation |
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Definition
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Term
| The 3 tools of monetary policy |
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Definition
1. Open Market Operations
2. Reserve Requirements
3. The Discount Rate |
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Term
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Definition
| The purchase and sale of US government bonds by the Fed |
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Term
| In an open market operations, how does the Fed increase the money supply? |
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Definition
| By buying government bonds, paying with new dollars |
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Term
| In an open market operations, how does the fed reduce the money supply? |
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Definition
| the fed sells government bonds, taking dollars out of circulation |
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Term
| Reserve Requirements (RR) |
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Definition
| Affects how much money banks can use to make loans |
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Term
| In a reserve requirement, how does the fed increase the money supply? |
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Definition
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Term
| In a reserve requirement, how does the fed reduce the money supply? |
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Definition
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Term
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Definition
| the interest rate of loans the Fed makes to banks |
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Term
| When banks are running low on reserves, who do they borrow reserves from? |
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Definition
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Term
| In the Discount Rate, how does the fed increase the money supply? |
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Definition
By lowering the discount rate
- encouraging banks to borrow more reserves from the Fed |
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Term
| With the Discount Rate, how does the Fed reduce the money supply? |
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Definition
| by raising the discount rate |
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Term
Which tool of monetary policy is the most important and most often used?
A. Open Market Operations
B. Reserve Requirements
C. Discount Rate |
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Definition
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Term
| The Fed is the " ________" |
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Definition
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Term
| The economy is in an ______ when using the expansionary monetary policy. |
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Definition
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Term
| In an expansionary monetary policy, what does the fed do? (3) |
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Definition
| buys securities, lowers reserve ratio, lowers discount rate |
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Term
| Will nominal or real gap increase with expansionary monetary policy? |
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Definition
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Term
| Easy money increase _______ spending |
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Definition
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Term
| The economy is in a ______ when Restrictive monetary policy is used. |
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Definition
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Term
| In a restrictive monetary policy, what does the fed do? |
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Definition
| sell securities, increase the reserve ration, increase the discount rate |
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Term
| Money is ______ in a restrictive monetary police |
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Definition
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Term
| The upsides of monetary policy when compared to fiscal policy (3) |
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Definition
1. speed and flexibility
2. isolation from political pressure
3. more subtle than fiscal policy |
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Term
| Problems with Monetary policy |
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Definition
1. Recognition and Operational lab
2. Cyclical Asymmetry - hard to pull economy out of a recession using monetary policy
3. Liquidity trap |
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