Economics Test 3 Flashcards
how to change the economy by changing the money supply
monetary policy
characteristics of money
medium of exchange
store of value
m1 includes
cash, coins, demand deposits, travelers checks
m2 includes
m1 + saving accounts, small denomination time deposits
m3 includes
m2 + large denomination time deposits
L includes
m3 + US savings bonds
how much cash is in the economy
monetary base
how much money can be created out of monetary base
money supply
the percentage of deposits the bank has to hold as cash either in their vault or on deposit at the federal reserve bank
required reserve ration
the amount of deposits the bank can do whatever it wants with
excess reserves
monetary base * DEM =
money supply
what is DEM
deposit expansion multiplier
how do you get DEM
1/RRR
discount rate changes every
6 months
required reserve ration changes every
25 years
3 tools of monetary policy
- required reserve ratio
- discount rate
- open market operations
to increase MS, you have to ___ RRR
lower
to decrease MS, you have to ____ RRR
raise
the interest rate the fed charges member banks to borrow money
discount rate
to increase MS, you have to ___ discount rate
lower
to decrease MS, you have to ___ discount rate
raise
the buy-ing and selling of government bonds by the fed
open market operations
to increase MS, the fed has to
buy bonds
to decrease MS, the fed has to
sell bonds
equation of exchange is also known as
quantity theory of money
equation of exchange
MV= PQ = nominal GDP
M means
money supply (m1)
V means
velocity
what is velocity
how many times in a year a dollar gets spent on average`
P means
Price level
Q means
Quantity of real output (real GDP)
MV =
total spending in the economy
PQ =
total income in the economy
total spending has to equal
total income
a rise in the general price level
inflation
the ONLY cause of inflation is
the money supply increasing faster than real output
(“too much money chasing too few goods)”
real interest rate + inflation rate=
nominal interest rate
fisher equation
/\M + /\v = /\P + /\Q
