Competency 4: Macro Flashcards
What is money?
- Store of value: it must hold value.
- Medium of exchange: widely accepted for transactions.
- Units of account: need to make change a compared different amounts.
What are the two types of currency?
- Fiat currency: no real value; value is set by the government market; standard.
- commodity currency real value like gold, silver; can be exchanged for set rate.
What is M1 and M2 money?
M1 = Currency, demand deposits, and traveler’s checks (most liquid forms of money)
M2 = M1 + savings deposits, time deposits, money market funds.
Why aren’t credit cards considered money?
They are liabilities, not assets.
changing the amount of M1 and M2 is?
Creating money
changing M1 or M2 changes what?
the money supply
What is the Federal Reserve (the Fed)?
The central bank of the U.S. that controls the money supply and regulates banks.
how does the Fed control M2?
By not printing money, but by controlling loans in bank behavior.
What happens when the Fed increases the money supply?
The Federal Funds Rate falls.
People need money for:
- Transactions
- Emergencies
- Speculating on Foreign Exchange Markets.
What happens when the Fed decreases the money supply?
The Federal Funds Rate rises.
How does a higher interest rate affect aggregate demand?
Reduces consumer/business spending, lowering demand.
What three actions can the Fed take to decrease the money supply?
Sell government bonds, raise the Discount Rate, increase Reserve Requirements.
The Federal Reserve System is…
The Board of Governors decides the Money Supply; 12 Regional banks each with a Head; 1 chairperson that oversees the Board of Governors.
What is the Monetary Policy (The Fed)?
Changes in Money Supply, that’s controlled by the Fed; the Fed doesn’t answer to the President
What is the tools of the Monetary Policy?
- Reserve Requirements Ratio: % banks must hold “reserves” at the Fed
- Interest Paid on Reserves: Fed pay banks on reserves
- Open market operations: buy/sell gov’t bonds to increase or decrease the money supply
- Discount Rate: Interest Fed charge banks
What is Fractional Reserve Banking?
Banks only required
to hold onto a portion of deposits; They loan out the rest creating money.
i.e., If $1,000 is deposited and the reserve ratio is 10%, the bank keeps $100 and loans out $900 — expanding the money supply.
What is the Federal Funds Rate?
The short-term interest rate at which banks make overnight loans to one another.
What three actions can the Fed take to decrease interest rates in a recession?
Buy government securities, lower interest on reserves, decrease the Discount Rate.
What is the impact of lower interest rates on the economy?
Stimulates investment and consumer spending, increasing aggregate demand.
What is the Crowding-Out Effect?
Expansionary fiscal policy raises interest rates, reducing investment, which offsets aggregate demand.
What is the Expenditure Multiplier Effect?
1 person’s spending = another’s person income.
What is Aggregate Demand?
Total demand for domestic goods and services produced in an economy.
What is the impact of decreased government spending?
Reduces aggregate demand.
