Unit 4 Monetary Policy
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
