Money, Banking, and Monetary/Fiscal Policy Flashcards
What is included in M1 money?
Includes paper and coin currency held outside banks and check-writing deposits. This is the narrowest definition of money and is based on including instruments used for transactions.
What is included in M2 money?
Includes M1 items plus certificates of deposit (less than $100,000), individual-owned money-market mutual funds, and certain other deposits. This measure of money is the primary focus of Fed actions to influence the economy.
What is included in M3 money?
Includes M2 items plus certificates of deposits (greater than $100,000), institutional-owned money-market mutual funds and certain other deposits (the FRS no longer provides a measure of M3).
What is MZM (Money Zero Maturity) money?
Includes highly liquid items that are readily available for spending at par value and consists of currency and coins, checking accounts, savings accounts, and all money market accounts. It is usually computed as M2 less time deposits (e.g. certificate of deposit) plus institutional-owned money market funds.
Monetary Policy - What is reserve-requirement changes?
A bank’s ability to issue check-writing deposits is limited by a reserve-requirement by the Fed on check-writing deposits.
Monetary Policy - What is open-market operations?
The Fed engages in open-market operations by purchasing and selling U.S. Treasury debt obligations (e.g., Treasury Bonds) from/to banks. The effect of purchasing Treasury obligations is to replace debt held by banks with additional reserves for the banks. The increase in reserves permits additional check-writing deposits (i.e., lending ability) by the banks. Sale of Treasury obligations has the opposite effect. Thus, open-market purchasing implements monetary easing, while open-market sales implements monetary tightening.
Monetary Policy - What is the discount rate?
The rate of interest banks pay when they borrow from the Federal Reserve Bank in order to maintain reserve requirements. By decreasing or increasing the discount rate, the Fed encourages or discourages borrowing from the Fed and, thereby, eases or tightens the money supply.
Monetary Policy - What is margin requirement?
The percentage of the cost of an investment in qualified (marginable) securities that an investor must pay for with his/her own funds; the percentage cost of such an investment for which the investor cannot use funds borrowed from a broker-dealer, bank, or other institution to purchase the securities.
What is Velocity of Money (income velocity of money)?
A measure of the rate at which money in circulation is used for purchasing new, domestically produced goods and services. It measures the average rate or frequency at which the money supply “changes hands,” or turns over in exchange transactions for goods and services during a period.
What is Expansionary Government Fiscal Policy?
Undertaken to stimulate economic activity and typically involves government spending exceeding taxes collected, resulting in a deficit.
What is Neutral Government Fiscal Policy?
No change in fiscal policy action because the economy is in equilibrium with government spending and tax collections in balance.
What is Contractionary Government Fiscal Policy?
Undertaken to dampen economic activity and typically involves government spending lower than tax collections, resulting in a surplus.
What is the Federal (Fed) Funds Rate?
The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution overnight without requiring collateral. The federal funds rate is generally applicable only to the most creditworthy institutions when they borrow and lend overnight funds to each other to satisfy reserve requirement shortages. When one depository institution has funds in excess of its reserve requirement needs, it may loan those funds to other institutions that have a reserve requirement shortage.
What is the Federal (Bank) Discount Rate?
The interest rate the Federal Reserve charges on loans made by the regional Federal Reserve Banks to eligible commercial banks and other depository institutions. Banks whose reserves fall below the Fed’s reserve requirement may borrow directly from the regional Federal Reserve Bank to correct their shortage.
What is the Prime (Interest) Rate?
The interest rate commercial banks charge their most creditworthy borrowers, usually large, financially sound corporations. It is one of the most widely used market lagging indicators, is a major benchmark for mortgage and credit card rates, and is often the basis for adjustable-rate loans.
