Final Macro Flashcards
M1
Currency (bills and coins) (half)
Checking accounts (other half)
Most liquid part of the money supply
Liquidity
determined by how fast, easily, and reliably it can be converted into cash
Functions of Money
- medium of exchange
- unit of account
- store of value
Roles of Financial Institutions
- reducing info costs
- reducing transaction costs
- diversifying assets to reduce risk
Bond Prices
Fluctuate in response to forces of the marketplace (market interest rates)
Bond Prices and Interest Rates
- coupon rate
- maturity date of the bond
- face value of the bond
Money Multiplier
measures the max amount the money supply can increase when new deposits enter the system
Federal Funds Rate
the interest rate that financial charge each other for overnight loans used as reserves
Tools of Monetary Policy
- Interest on reserve balances
- discount rate
- open market operations
- reserve requirement
Goals of Monetary Policy
- economic growth with low employment
- stable prices with moderate long-term interest rates
Expansionary Monetary Policy
- used in times of economic downturn to boost aggregate demand
- the fed purchases bonds to push the interest rate lower, leading to more spending and investment
Contractionary Monetary Policy
- used when inflationary pressures build up in the economy
- the fed sells bonds to push the interest rate higher, slowing down or reducing aggregate demand
Classical Monetary Theory
- focus on long run adjustments
- wages, prices, rates are flexible
- quantity theory of money
Keynesian Monetary Theory
- could create more activity for an economy in the short-run
- would have no effect when an economy is in the midst of a deep recession or depression
Monetarists Theory
believe that expansionary monetary policy only creates inflation
Demand Shocks
can come from reductions in consumer demand, investment, gov spending, or net exports
Supply Shocks
arise from changes in:
- resource cost
- inflationary expectations
- technology
Fed purchases bonds to push interest rates lower…
leads to more spending and investing
Fed sells bonds to push interest rate higher…
leads to slowing down and reducing aggregate demand
Financial Intermediaries
Banks, mutual funds, insurance companies
Acquire funds from savers and then lend those funds to borrowers
The main tool of monetary policy
interest on reserve balances
Classical Economists
believe that in the short run, changes in the money supply will not change the output
Equation of Exchange
M x V + P x Q
