Modules 22-30- econ

Ace your homework & exams now with Quizwiz!

Responsibilities of the Fed

* control the monetary base * set the reserves requirement * oversee and regulate banking system * set the discount tare

Outflows of funds

* domestic savings that finance investment spending

Inflows of funds

* foreign savings that finance investment spending

Budget Deficit

* gov spends more than tax revenue * taxes are less than gov spending

Budget Surplus

* govt spends less than collected

To increase the money supply :

* lower the reserve requirements * lower the discount rate * make open market purchases

To decrease the money supply :

* make open-market sales * increase the reserve requirements * increase the discount rate

Savings-Investment spending identity

* savings and investment are always equal for the economy as a whole * savings = IS

3 Tasks of Financial system

* transaction costs - expense of putting together and executing a deal * risk - uncertainty of future outcomes * desire for liquidity - quickly converted cash

Tools of Monetary Policy

*reserve requirements * open-monetary operations * discount rate

(disposable income - consumption spending) =

= (tax receipts - govt spending)

A rise in money demand shifts the money demanded curve to the right

A fall in money demand shifts the money demand curve to the left

At high interest the demand for money decreases

At low interest the demand for money increases

Bonds

IOU issued by the borrower

The demand for money is negatively related to the interest rate

The demand for money is positively related to real GDP

Mutual Funds

a group of stock, very diverse

Fiat Money

a medium of exchange whose value derives entirely from its official status as a means of payment

Stocks

a share in the ownership of a company

Fisher Effect

an increase in expected future inflation drives up the nominal interest rate, leaving the expected real interest rate unchanged

If the required reserve ratio is increased ...

banks cannot lend out as much money which decreases the money supply

If the required reserve ratio is reduced ...

banks will lend a larger percentage of their deposits which increases the money supply because of the money multiplier

Pension Funds

collect the savings of members and invest in a wide variety of assets to use for retirement

M1

contains only currency in circulation, cash, traveler's checks, and check-able bank deposits * most liquid

Pessimistic views of opportunities

decrease demand for loanable funds; shift to the left

Decrease in government borrowing

decreases the demand for loanable funds; shift to the left

Demand for loanable funds

downward sloping because investors respond to lower interest rates by increasing their quantity demanded of loanable funds

Loanable Funds Market

hypothetical market that illustrates the market outcome of the demand for funds generated by borrowers and the supply of funds provided by lenders * borrowers are represented by the demand for loanable funds

Positive views of interest rate

increase demand for loanable funds; shift to the right

Increase of government borrowing

increases the demand for loanable funds; shift to the right

currency in circulation

is cash held by the public

if the price of an asset is expected to rise in the future ...

it will be more in demand today

Loans

lending agreement between a lender and a borrower

Closed Economy

national savings = private savings + budget balance * savings investment spending identity is I = GDP - C - G

Financial Assest

paper claim

Crowding Out

private investment decreases when the government borrows * negatively affects the economy by reducing investment spending on physical capital

Liability

requirement to pay money back in the future

A decrease in taxes on savings and investment income will ...

shift supply to the right and decrease the interest rate

If people are willing to spend more and save less ...

shift the supply of loanable funds to the left

A decrease in savings by the private sector will ...

shift the supply of loanable funds to the left and increase the interest rate

If people are spending less and saving more ...

shift the supply of loanable funds to the right

An increase in savings by the private sector will ...

shift the supply of loanable funds to the right and decrease the interest rate

The money demand curve

shows the relationship between the quantity of money demanded and the interest rate

M2

starts with M1 and adds several other kinds of assets that can quickly be converted into cash, include saving accounts, CDs, money market accounts

Physical Asset

tangible object

Government can engage in savings when

tax revenues are greater than expenditures

Budget Balance

taxes - govt spending

How does an increase in the money market effect equilibrium rate of interest?

the equilibrium rate falls

Reserve Ratio

the fraction of bank deposits that a bank holds as reserves

Discount Rate

the interest rate the fed charges on loans to banks

If banks increase their excess reserves (funds not lent out) ...

the monetary base increases without increasing the money supply

If the required reserve ratio falls...

the money multiplier increases

Businesses want to borrow to undertake an investment project when ...

the rate of return on that project is greater than the interest rate

Money Multiplier

the ratio of the money supply to the monetary base * equal to 1/reserve ratio

Required Reserve Ratio

the smallest fraction of deposits that the Federal Reserve allows banks to hold

Monetary Base

the sum of currency in circulation and the reserves held by banks

If the interest rate is above the equilibrium rate ...

there will be an excess of money and the interest rate will fall

Taxes

total income - consumption - private savings

Capital Inflow

total inflow of funds - total outflow of funds

Open Economy

total investment = national savings + capital flow

Supply for loanable funds

upward sloping because savers respond to lower interest rates by decreasing their quantity supplied of loanable funds

financial assets that carry more risk ....

usually have a higher rate of return

Bank Deposits

you loan your money to the bank and the back pays you interest


Related study sets

CH 31 LISTENING QUIZ: Mozart: Eine kleine Nachtmusik (A Little Night Music), K. 525, I and III LG 21

View Set

Investment Companies: Variable Annuities (UITs)

View Set

Physiology of Behavior Chapter 5: Recording and stimulating neural activity

View Set

Perry Ch 22-24 Practice Questions

View Set