Macroeconomic Principles Flashcards
What tools does the Federal Reserve have with regards to monetary control?
FOMC - Federal Open Market Committee and the open market operation, the purchase and sale of U.S. government bonds.
What are open market operations?
The purchase and sale of U.S. government bonds.
When the Fed buys bonds, what impact does this have on the money supply and aggregate demand?
After the purchase, these dollars are in the hands of the public. Thus, an open-market purchase of bonds by the Fed increases the money supply.
When the Fed sells bonds, what impact does this have on the money supply and aggregate demand?
After the sale, the dollars the Fed receives for the bonds are out of the hands of the public. Thus, an open-market sale of bonds by the Fed decreases the money supply.
What is a discount rate?
The interest rate banks pay when borrowing from the Federal Reserve.
When the Fed reduces the discount rate, what impact will this have on the money supply and the aggregate demand?
A lower discount rate encourages banks to borrow from the Fed, increasing the quantity of reserves and the money supply.
When the Fed increases the discount rate, what impact will this have on the money supply and the aggregate demand?
Higher discount rate discourages banks from borrowing reserves from the Fed, reducing the quantity of reserves in the banking system, which in turn reduces the money supply.
What is a reserve ratio?
The fraction of total deposits that a bank holds as reserves.
What would the Fed need to do with the reserve ratio in order to increase the money supply and aggregate demand in the economy?
Decrease the reserve requirements; therefore lowering the reserve ratio.
What would the Fed need to do with the reserve ratio in order to decrease the money supply and aggregate demand in the economy?
Increase the reserve requirements; therefore raising the reserve ratio.
If the Fed uses monetary policy in a way that increases money supply, what effect will this have on interest rates and aggregate demand (consider them separately)?
Interest rates lower and aggregate demand expands.
If the government uses fiscal policy to increase government spending what impact will this have on interest rates and aggregate demand?
Raises interest rates and an increase in aggregate demand.
If the government uses fiscal policy and cuts taxes, what effect will this have on interest rates and aggregate demand?
Raises interest rates and an increase in aggregate demand
What is money
Requires 3 things to be money:
- store of value (holds value well)
- medium of exchange (used in exchange for goods and services)
- unit of account (be divisible- make change- etc)
What is the difference between micro and macro economics
Macroeconomics is the big picture - unemployment inflation, etc.
What does inflation attack
The value of money
Historical money
Things that have been used as money in the past. Ex. Seashells, gold, teeth etc.
What are the two types of currency
Fist and commodity
Fiat currency
Currency whose value is set by the government or the market
Commodity currency
Currency which is made of a valuable commodity (like gold or silver)
What is printing money?
It is replacing older worn bills.
What is M1
Physical money in peoples hands. Liquid assets
What is M2
Total money in supply. Savings, funds, etc.
Not liquid. It would take an extra step such as going to the atm, closing a fund, etc.
Is a credit card money
It is not money, it is debt
At high interest rates, what is the demand of money.
Low demand of money
If money demand rises, what happens to interest rates
Market interest rate rises
What is monetary policy
Change of money supply controlled by the federal reserve.
Who is the federal reserve
An independent institution that controls the money supply to attempt to control the interest rate in order to affect aggregate demand ultimately affect the GDP and unemployment.
What are the 3 tools of the federal reserve?
Reserve requirement ratio
Open market operations
Discount window rate
Reserve requirement ratio
How much the bank must keep as “reserves” at the federal reserve (our bankers bank)
Open market operations
The buying and selling of US Government treasuries (bonds)
Discount window rate
The rate of interest the Federal Reserve charges banks when banks borrow from the fed (to net their reserve requirements)
If a reserve requirement is 10% how much of my $100 deposit will go into loans?
$90 goes into loans $10 goes into the reserve
Bank loans and money supply
The process of loan to deposit to loan creates money
What happened in 2008 with bank loans
Banks stopped lending and people stopped borrowing. Money stopped being created.
What is fiscal policy
It is controlled by congress
It controls government expenditures and taxes
Monetary policy
- Controlled by the federal reserve
- Controls the amount of money in the economy and thus the market interest rate.
