Econ Unit 4 + 5 MCQ Final Flashcards
Shifters of money supply
- Reserve Ratio- % of deposits banks must hold (RR decrease, MS increases)
- Discount Rate- The interest rate the FED charges banks (DR decrease, MS increases)
- Open Market Operations- FED buys or sells bonds (buys bonds, money supply increases)
What money is
- Medium of exchange
- Unit of account –> acts as a measurement of value
- Store of value –> store purchasing power for the future
Commodity Money
actual things with value –> gold, silver
Fiat Money
Serves as money but has no other value –> cash, coins
Checkable Deposits
accounts where owners can take out money at anytime
M1 Money (highest liquidity)
- Currency in circulation
- Checking accounts
- Travler checks
Liquidity
how easy an asset can be converted to cash without effecting its market value
M2 Money (Near-Moneys)
Everything in M1 +
1. Savings deposits
2. Time deposits (has interest)
3. Money market funds
Assets (Low-Liquidity)
- Stocks
- Bonds
- Real Estate
Stocks (equity)
buying part of company –> when its worth more, your stock is worth more and vice versa
Bonds (securities)
Loaning out your money to gov. or companies who will use it then pay it back with agreed upon interest rate
Bond Prices & Interest rates
inversely proportional
Required reserves
minimum amount of deposits banks must hold
Excess reserves
amount banks can loan out
money multiplier
1/reserve ratio
Required reserve ratio is 25%, someone deposits $700. what will be the total change in money supply?
$2,800
Recessionary Gap
increase in unemployment and a decrease in output
Expansionary Gap
increase in output and a decrease in unemployment
MS what should FED do for recessionary Gap (increase money supply)
- decrease reserve ratio
- decrease discount rate (DR is the amount the FED charges banks for giving out loans)
- Open market operations (FED buys bonds –> no reserve requirements so it goes directly into circulation) / FED buys bonds
MS what should FED do for expansionary Gap (decrease money supply)
- increase reserve ratio
- Increase discount rate
- FED sells bonds
Ample reserves
monetary reserves
currency in circulation and held by bank reserves
expected real interest rate
nominal IR - expected inflation rate
nominal IR & quantity of money
inverse and money is sloping downward
increase in price level, how will it effect money market & bond market
nominal IR increases and price of previous bonds fall
