Unit 4 Monetary Policy

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Purchasing Power of Dollar Formula

1/P (1/Price Level)

Money Multiplication Rate

1/RR * Excess Reserves

Reserve Ratio (description)

% of CHECKABLE DEPOSITS banks must keep on hand

Commercial Banks

Accept household and business deposits. Use deposits to make wide variety of loans--short term loans to business, consumer finance, auto, and other durable goods

Commodity Money

An item with inherent value on its own (e.g. diamonds, gold, silver, salt)

Discount Rate (description)

Interest rate the FED charges member banks for emergency loans

M0

Base money or currency/cash/coin that "physically" exists in circulation

Open Market Operations (description)

Buying and selling bonds on Open Market

Fiscal Policy

Change in government spending/taxes to steer the economy

Fiat Money

Coin and paper money that have been decreed to have value by the government. (Money has value because you believe it has value)

Token Money

Coins made with low cost materials to keep people from melting them down to make a profit.

5 major characteristics of (good) money

Durability, Portability, Divisibility, Stability, Acceptability

Moral Suasion

Fed "threatens" to use tools to steer the economy (tightening the belt)

Discount Rate (How to calculate)

Federal Funds Rate (FFR) + 0.25%

Representative Money

Has value because it can be exchanged for something else of value. No intrinsic value (e.g. silver certificates)

Monetary Policy

Increasing or decreasing money supply to steer the economy

Federal Funds Rate

Interest rate banks charge each other for loans

M1

M0 + Checkable Deposits/Travelers Checks

M2

M1 + Savings Deposits and Time Deposits < $100K

M3

M2 + Time Deposits > $100K (Not usually reported anymore)

Discount Rate Increases

MS decreases, i increases, C/I decreases, AD decreases, rGDP decreases, PL decreases, UE increases

Open Market Operations sell securities (bonds)

MS decreases, i increases, C/I decreases, AD decreases, rGDP decreases, PL decreases, UE increases

Reserve Ratio Increases

MS decreases, i increases, C/I decreases, AD decreases, rGDP decreases, PL decreases, UE increases

Discount Rate Decreases

MS increases, i decreases, C/I increases, AD increases, rGDP increases, PL increases, UE decreases

Open Market Operations buy bonds

MS increases, i decreases, C/I increases, AD increases, rGDP increases, PL increases, UE decreases

Reserve Ratio Decreases

MS increases, i decreases, C/I increases, AD increases, rGDP increases, PL increases, UE decreases

Quantity Theory of Money

MV=PQ

3 functions of money

Medium of exchange, A unit of account, A store of value

Thrift Institutions

Savings, Loans, and Mutual banks that take consumer and business deposits and specialize in financing mortgages and some other loans


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