CH 4-5 Money Banking, the Fed and Inflation Flashcards
3 Uses of Money
Medium of exchange, unit of account and measure of value
Commodity Money
Holds its one value (gold, silver)
Fiat Money
Has no physical value, purchasing power is more than physical worth ($100 Bill)
What is M1?
Money Supply= Currency + Deposits
R= Reserves
What is M2?
Currency + Deposits + Expanded Deposits
more inclusive than M1
Reserve Requirement
A minimum amount of money a bank must hold as a fraction of their deposits held
4 Ways the Fed affects money supply
- Change reserve requirement
- Open Market Operations (Buy/Sell gov bonds)
- Discount Rate
- Interest on Reserves
Open Market Operations
The Fed buying and selling government securities to change the money supply.
Buying INCREASES the Money Supply
Selling DECREASES the Money Supply
To Increase the Money Supply…
Lower the rr
Buy Gov Securities
Lower Discount Rate
Lower Interest on Reserves
Monetary Base
B - the total number of dollars held by the public as currency and by the banks as reserves
Reserve Deposit Ratio
rr - The fraction of deposits that banks hold in reserves
Currency Deposit Ratio
cr - The amount of currency C people hold as a fraction of their deposits
Money Multiplier
cr+1/
cr+rr
-OR-
m= M/B
M=
M= m x B
Money Supply= money multiplier x base
Discount Rate
The interest rate that the Fed charges on loans to banks
