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Honors Econ Unit 5

Money, Federal Reserve System Monetary Policy

TermDefinition
Money any asset that can easily be used to purchase goods and services
Currency in Circulation cash held by the public.
Checkable Bank Deposits bank accounts on which people can write checks
Money Supply the total value of financial assets in the economy that are considered money
Medium of Exchange asset that individuals acquire for the purpose of trading rather than for their own consumption
Store of Value means of holding purchasing power over time
Unit of Account a measure used to set prices and make economic calculations
Fiat Money a medium of exchange whose value derives entirely from its official status as a means of payment.
Near-moneys financial assets that can't be directly used as a medium of exchange but can readily be converted into cash or checkable bank deposits
No, because they're not liquid enough. Are financial assets like stocks and bonds part of the money supply?
M1 assets you can use to buy groceries: currency, traveler's checks, and checkable deposits.
M2 includes savings accounts that can be converted into M1
T-account tool for analyzing a business's financial position and by showing a table with its assets on the left and its liabilities on the right.
Bank reserves currency banks hold in their vaults plus their deposits at the Federal Reserve
Reverse Ratio the fraction of bank deposits that a bank holds as reserves
Deposit Insurance guarantees that a bank's depositors will be paid even if the bank can't come up with the funds, up to a maximum amount per account. The FDIC guarantees the first $250,000 of each account.
Reserve Requirements rules set by the Federal Reserve that determine the minimum reserve ratio for a bank. For example, in the US the minimum reserve ratio for checkable bank deposits is 10%
Federal Funds Market allows banks that fall short of the reserve requirement to borrow funds from banks with excess reserves
Federal Funds Rate interest rate determined in the federal funds market
Discount Rate the rate of interest the Federal Reserve charges on loans to banks
Central Bank an institution that oversees and regulates the banking system and controls the monetary base.
Federal Reserve a central bank, an institution that oversees and regulates the banking system, and controls the monetary base.. consists of the Board of Governors in DC plus regional Federal Reserve Banks, each serving 12 Reserve districts
Expansionary Monetary Policy increases aggregate demand. Easy Money. the Federal Reserve uses its tools to stimulate the economy
Stimulate Economy usually means lowering the federal fund rate to increase the money supply, causing mortgage rates to decline, consumers to borrow and spend, and businesses to grow, thereby hiring more workers who well consume even more.
Contractionary Monetary Policy Monetary Policy that reduces aggregate demand. The Effects are the opposite of monetary policy. Tight Money.
Decrease Money Supply 1. Sell securities on the open market (Open Market Operations) 2. Raise the Federal Discount Rate 3. Raise Reserve Requirements.
Contractionary monetary policy causes a decrease in... ...bond prices and an increase in interest rates.
Higher interest rates lead to... ...lower levels of capital investment
The higher interest rates make domestic bonds more attractive causing... ...the demand for domestic bonds to rise and the demand for foreign bonds to fall.
The demand for domestic currency rises and the demand for foreign currency falls causing... ...an increase in the exchange rate.
A higher exchange rate causes... ...exports to decrease, imports to increase, and the balance of trade to decrease.
To close a recessionary gap the Fed could: - lower discount rate -lower reserve requirement -lower the federal fund rate -buy back securities -increase aggregate demand
To close an inflationary gap, the Fed could: -raise interest rates -raise the reserve requirement -sell securities -decrease aggregate demand
The increase in supply of bonds... ...reduces the price for bonds
Created by: asb1022
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