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