Macro chapters 14-16
What function is money serving when you deposit money in a savings account?
A store of value
The interest rate that the Fed charges banks for loans to them through the traditional channel is called:
Discount rate
Functions of money
medium of exchange, unit of account, store of value
the purchasing power of the dollar
to find the value of the dollar divide 1 by the price level
why do we hold money in our pockets?
transactions, speculation, emergencies
Which line in the above graph would best reflect the slope of the transactions demand for money curve?
vertical line
acceptability
we accept paper money in exchange because we are confident that it can be exchanged for real goods and services
the reserve requirements
what banks cannot lend out
unit of account
yardstick for measuring the relative worth of a wide variety of goods, services, and resources
team auction
auction of money to banks each month
characteristics of fractional banking
banks can create money through lending. banks are vulnerable to panics and runs
open market operation
buying and selling T-Bills
quantitative easing
buying and selling financial assets like mortgage-based securities and long term bonds.
the demand for money
how much money we hold in our pockets
what would happen in Money supplied increased?
-the quantity supplied is greater than the quantity demanded - banks are loaded with money but no one wants to borrow -because of this the interest rate is lowered -as the rate falls, businesses can borrow money cheaper to buy more, which creates profitability, and consumers can now afford the products and services.
If the Fed buys $1 million in government securities from Bank A, then the immediate effect of this transaction is an increase in:
Bank A's excess reserves
Money supply M1 does not include the currency held by:
Commercial banks
The Federal backing for money in the United States comes from
Controlling the money supply in order to keep the value of money relatively stable over time
The basic requirement of money is that it be:
Generally accepted as a medium of exchange
Michelle transfers $4,000 from her savings account to her checking account. What effect is this change likely to have on M1 and M2?
M1 increases and M2 stays the same
money definition (m2)
M1 plus several near monies
the supply for money
M2
Joe Rogers deposits $200 in currency in his checking account at a bank. This deposit is treated as:
No change in the money supply because the $200 in currency has been converted to a $200 increase in checkable deposits
Which one of the following is a tool of monetary policy for altering the reserves of commercial banks?
Open-market operations
The Federal Reserve can increase aggregate demand by:
Reducing the discount rate
The Federal Open Market Committee (FOMC) of the Federal Reserve System is primarily for:
Setting the Fed's monetary policy and directing the purchase and sale of government securities
What policy tool of the Federal Reserve relies on bank borrowing to be effective?
The discount rate
monetary multiplier
The multiple by which the banking system can lend on a basis of each dollar of excess reserves in the reciprocal of the reserve ratio. The process is reversible.
If the value of the dollar is falling, then it follows that:
The price index is rising
Assume the economy faces high unemployment but stable prices. Which combination of government policies is most likely to reduce unemployment?
The purchase of government securities in the open market and an increase in government spending
monetary policy
a change in money supply changes the FFR which causes other interest rates to change, which causes changes in interest sensitive spending
what is the value of money based on?
acceptability, legal tender, relative scarcity
medium of exchange
acceptable payment for buying and selling goods and services
checkable deposits
all deposits in commercial banks and savings institutions
near monies
certain highly liquid financial assets that do not function directly or full as a medium of exchange, but can be readily converted into currency
currency
coin and paper money
How does a bank create money
commercial banks create checkable deposits when they make loans. They convert IOUs which are not money into checkable deposits which are money
what would shift the (I+CD) curve
consumer and business confidence, risk, uncertainty of the future, the inflation rate, excess capacity, RGDP
money definition (m1)
currency and all checkable deposits
store of value
enables people to transfer purchasing power from the present to the future
4 types of interest rates
federal fund rate, discount rate, prime rate, t-bill rate
Fractional banking system
only a portion of checkable deposits are backed up by reserves of currency in bank vaults
6 ways the FED can change the money supplied
open market operations, the discount rate, the reserve requirements, team auction, paying interest on the reserves held at the FED, quantitative easing.
legal tender
paper money is a valid and legal means of any payment of any debt that was contracted in dollars
categories of near monies
savings deposits, small-denominated time deposits, money market mutual funds held by individuals
Taylor Rule
tells the FED what the optimal FFR should be given the current state of the economy
what "backs" the money supply
the U.S. money supply is backed by the government's ability to keep the value of money stable
multiple expansion of loans in money
the commercial banking system as a whole can lend by a multiple of its excess reserves because the system as a whole cannot lose lose reserves. Individual banks can lose reserves to other banks in the system
Which line in the above graph would best reflect the slope of the asset demand for money curve?
the downsloping line
liquidity
the ease with which an asset can be converted into the most widely accepted form of money
federal fund rate
the interbank, overnight lending rate of at least 1 million dollars. The FED watches this the most closely
The money market
the money market has a supply and demand for money and it determines the equilibrium rate of interest
Interest
the price paid for the use of money
discount rate
the rate at which the FED lends to banks when banks borrow from the FED
the discount rate
the rate that the FED charges banks
prime rate
the rate that the banks charge their most preferred customers
t-bill rate
the rate that the treasury pays for lending to the treasury- our national debt
The investment demand schedule
the relationship between the interest rate and investment and durable good spending
relative scarcity
the value of money depends on supply and demand