Macro Final

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Four Monetarists Positions

1. Velocity changes in predictable way but does not change very much form one period to the next 2. Aggregate demand depends on the money supply and velocity 3. The SRAS curve is upward sloping 4. The economy is self regulating ( prices and wages are flexible)

If Real GDP is $8,000, the money supply is $3,100, and velocity is 4, then the price level is

1.55

The Monetarist Transmission Mechanism

Changes in the money market directly affect aggregate demand in the goods and services market

Monetary policy

Changes in the money supply, or in the rate of change of the money supply, to achieve particular macroeconomic goals

M1 money supply

Currency held outside banks , + checkable deposits and + travelers checks

The major policy making group within the fed

FOMC

M2 money supply

Is equal to M1, + savings deposits. ( including money market accounts) , + small denomination time deposits and + money market mutual funds (retail)

Real interest rate caculation

Nominal interest - expected inflation rate

Can continued declines in SRAScause continued inflation?

Not likely as it is not supported by recent history , and wages are not likely to increase as demand for labor decreases

Tools for increasing and decreasing the money supply

Open market operations, required reserve ratio and discount rate

Nominal interest rate caculation

Real interest rate + expected inflation rate

Demand for money

Represents the inverse relationship between the quantity demanded of money balances and the price of holding money balances , interest rate is the price (opportunity cost) of holding money balances

Excess reserves calculation

Reserves - required reserves

If bank A borrows $10 million from bank B, what happens to the reserves in bank A? What happens in the banking system?

Reserves in bank A rise; reserves in the banking system remain the same (bank B loses the reserves that bank A borrowed).

If bank A borrows $10 million from the Fed, what happens to the reserves in bank A? in the banking system?

Reserves in bank A rise; reserves in the banking system rise because there is no offset in reserves for any other bank.

Federal open market committee

The 12-member policy making group within the fed , a 7 member board of governors and 5 federal reserve district bank presidents

Money as a store of value

The ability of an item to hold value over time

Open market operations

The buying and selling of government securities by the fed

Open market purchase

The buying of U.S. government securities by the fed

Real interest rate

When the expected inflation rate is zero, the real interest rate equals nominal interest rate

Continued Inflation

a continued increase in the price level

Discount loan

a loan the fed makes to a commercial bank

Federal Funds Market

a market where banks lend reserves to one another, usually for short periods

One - Shot inflation

a one-time increase in the price level. an increase in the price level that is NOT continued

Money as a unit of account

A common measure in which relative values are expressed

Required reserves ratio (r)

A percentage of each dollar deposited that must be held on reserves (at the fed or in the banks vault )

Money

Any good that is widely accepted for purposes of exchange and in the repayment of debt

Excess reserves

Any reserves held beyond the required amount

Money as a medium of exchange

Anything that is generally acceptable in exchange for goods and services

Equilibrium in the Money Market

At an interest rate of i1, the money market is in equilibrium : There is neither an excess supply of money nor an excess demand for money

Reserves calculation equals

Banks deposits at the fed + vault cash

If checkable deposits in Bank A total $300 million and the required reserve ratio is 10 percent, then required reserves at Bank A equal

$30.0 million

If the federal reserve sets the legal reserve requirement at 1.00 then

all bank deposits would be held as required reserves

which of the following represents an action by the federal reserve that is designed to decrease the money supply?

an increase in the discount rate

If the fed buys government securities , then there is

an increase in the supply of money

What causes continued increases in aggregate demand?

continued increase in M and continued increase in AD -> continued inflation

What is the most important responsibility of the Fed?

the fed controls the money supply

Monetary policy - Contractionary

the fed decreases the money supply to address an inflationary gap

Federal Funds Rate

the interest rate in the federal funds market; the interest rate banks charge one another to borrow reserves

Discount rate

the interest rate the fed changes depository institutions that borrow reserves from it; the interest rate charged on a discount loan

Open market sale

the selling of U.S. government securities by the fed

The supply of Money

the supply curve of money is a vertical line at the quantity of money, which is largely, but not exclusively, determined by the Fed

A bank reduces its deposits at the fed by $5 million and increases its vault cash by $5 million. What happens to the banks reserves?

they remain constant

Why do banks borrow reserves

to increase loan making ability, and to meet required reserves requirements

an open-market sale of securities by the fed results in _____ in reserves and _____ in the supply of money

decrease;decrease

a decrease in the discount rate will most likely

increase the money supply

an open market purchase of securities by the fed results in _____ in reserves and ____ in the supply of money

increase; increase

when the fed lowers the required reserve ratio, the banks excess reserves _____ and the money supply ___

increase; increase

One-shot inflation can originate

on the demand side or the supply side of the economy.

The most commonly used tool in monetary policy is

open market operations

which of the following statements is true?

open market operations can be used by the federal reserves with some precision

Required reserves calculation equals

r x checkable deposits

What is the difference between the federal funds rate and the discount rate?

The federal funds rate is the interest rate that one bank charges another bank for a loan. The discount rate is the interest rate that the Fed charges a bank for a loan.

Board of governors

The governing body of the federal reserve system, they coordinates and control activities of the federal reserve system

Nominial interest rate

The interest rate actually charged ( or paid) in the market; the market interest rate

Requires reserves

The minimum amount of reserves a bank must hold against its checkable deposits as mandated by the fed

Federal open market committee II

The president of the federal reserves bank of New York holds a permanent seat on the FOMC and the other four positions are rotated among the federal reserve bank district bank presidents

Reserves

The sum of bank deposits at the fed and vault cash

Simple Quantity Theory of Money

The theory that assumes that velocity and Real GDP are constant and predicts that changes in the money supply lead to strictly proportional changes in the price level

How does the money supply change as a result of (a) an increase in the discount rate, (b) an open market purchase, (c) an increase in the required reserve ratio

a. the money supply falls. b. The money supply rises. c. The money supply falls.

If the federal reserve raises the legal reserve requirement from 0.10 to 0.20 then,

banks will reduce the loans they make and the money supply in the economy will fall

The fractional reserve banking system is one in which banks within the system

can lend out only a fraction of their reserves

The discount Window

fed sets discount rate below federal funds rate -> banks borrow from fed -> banks have more reserves -> banks may make more loans and checkable deposits -> money supply rises

Maximum change

in checkable deposits = (1/r)

Equation of exchange

money supply times velocity must be equal to the price level times Real GDP

If the Fed lowers the discount rate (relative to the federal funds rate), banks will (likely) borrow __________ from the Fed, which will __________ reserves in the banking system, and eventually __________ the money supply.

more, increase, raise

Monetary policy - Expansionary

the Fed increases the money supply to address a recessionary gap


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