Exam 3 - Chapter 15 Flashcards
What are 2 ways money can be better than other money?
- Stability of value
- Convenience (gold coins vs paper dollar — dollar easier to carry)
M1
Public savings + demand deposits + travelers checks
M2
M1 + savings accounts + savings deposits + money market mutual funds + small time deposits
3 reasons for money?
Store of Value
-represents certain amount of purchasing power
Medium of Exchange
Unit of Account
-money used to compare goods/services
What is Commodity-backed money?
Money that can be exchanged for in a fixed amount for something else (gold)
What is money that cannot be exchanged at a fixed rate for a commodity called?
Fiat Money
___ paper money made it possible for banks to create money.
Fractional-reserve banking
The ___ is the ratio of money created by the lending activities of the banking system to the money created by the central bank
Money multiplier
what is the Money Multiplier formula?
1/R
The ___ is the institution responsible for managing the nation’s money supply and coordinating the banking system.
Central Bank
*Central bank is Federal Reserve in U.S.
What is the Federal Reserve’s dual mandate?
- ensure price stability
- maintain full employment
___refers to the actions made by the central bank to manage the money supply.
Monetary Policy
Federal Reserve is mandated by Congress to conduct monetary policy to perform two essential functions:
Manage money supply
Act as lender as last resort
The ___ is the lending facility that allows banks to borrow reserves from the Fed.
Discount Window
3 tools that monetary policy can use to control the economy are?
inc/dec Reserve Requirement
-too powerful of tool and rarely used
Discount Window
-Federal Reserve lends money to banks at Discount Rate (rarely used)
Open-market Operations
-Federal Reserve buys/sells bonds from banks to regulate money supply
Why is it a bad sign for banks to be borrowing money from the Federal Reserve?
Because banks pay Discount Rate (interest rate)
Discount Rate > Market Rate
If the discount rate increases, than the amount of money ___
Decreases
What happens to the money supply when the Federal Reserve buys/sells bonds
Buys Bonds
-money supply increases
Sells Bonds
-money supply decreases
Explain the Federal Funds Rate
- is a interest rate
- rate at which one bank loans money to another bank so they can meet their reserve requirements
How is the Federal Funds Rate affected when the Federal Reserve buys/sells bonds
Federal Reserve buys Bonds
-Federal Funds Rate decreases
Federal Reserve Sells Bonds
-Federal Funds Rate Increases
The ___ refers to the idea that the quantity of money people want to hold is a function of the interest rate.
liquidity-preference model
___ policy is when money supply is decreased to lower aggregate demand.
___ policy is when money supply is increased to raise aggregate demand.
Contractionary monetary
Expansionary monetary
