Unit 4 Flashcards
Commodity money
Money that has intrinsic value (gold or silver)
Fiat money
Money with no intrinsic value ex cash
Stocks
Shares of a company you can own
Bond
An iOU made by the government
Transaction demand for money
When a person demands money in order to buy something as in a transaction
Asset demand money
When money is demanded to buy assets, such as stocks and stuff
Reserve requirements
The required percent set by the fed of money that the banks need to hold.
What reserve requirement does. And how it shifts
It changes the money supply
- increase for a decrease in the MS
- Decrease for a decrease in MS
What is the discount rate and how does it shift
The minimum interest rate set by banks for lending to other banks
- Increase discount rate to reduce MS
- decrease discount rate to increase MS
Open market operations and how they shift
The buying and selling of treasury bonds
Buy bonds to increase the money supply
Sell bonds to decrease the money supply
How are Interest rates related to investment spending
Inversely. High interest, means small investments
More money made on interest
How is the money supply related to the AG
They are directly related
The three functions of money
Medium of exchange, unit of account, store of value
Money multiplier
1/rr this is multiplied with the amount the bank can lend out, not the total deposit
Money market graph
Supply of money (vertical)
Demand for money(downward sloping)
Y axis: nominal interest rates
X axis: quantity of money
Investment market graph
Investment demand( downward sloping) Y axis:rate of interest X axis:amount of investment
How does and increase in money supply affect money market
Shifts MS to the right
How does and increase in money supply affect investment
Shift along the curve to the right
How does and increase in money supply affect AD/AS
Increase aggregate demand
How the fed fixes a recessionary gap
Decrease reserve requirements
Decrease discount rate
Buy treasury bonds
How does the Fed combat an inflationary gap
Raise reserve requirement
Raise discount rate
Sell treasury bonds
Wealth
The value of accumulated savings
Physical assets
A valid on tangible objects that gives the owner right to claim it as a form of money
Financial asset
Paper claim that entitles buyer to future income from seller
Liability
Requirement to pay money in the future
Liquid
How quickly something can be converted into cash without s loss of value
Illiquid
Can’t be converted into money without loss of value
M1 money
Currency in circulation, travelers checks, and checkable bank deposits
M2 money
All of M1 plus everything that can be converted into cash
Shifters of money demand curve
Aggregate price level (directly related)
GDP (directly related)
Information technology (inversely related)
Income (directly related)
Liquidity preference model of interest rates.
Interest rate is determined by the supply and demand of money
Money supply curve
A vertical curve, can be moved by the federal reserve
Bank run
Withdraw phenomenon where many bank depositors try to withdraw their funds due to fear of bank failure
Deposit insurance
Guarantees that deposit will be paid even if there is no funds. Fed will pay
How do banks affect the money supply
Remove currencies in circulation
Create money though loans and deposits
How do open market operations change money supply
Buy big (increase) Sell small (reduce)
Loanable funds graph
Supply LF (positive slope) Demand LF (negative slope) Y axis: interest rate X axis: quantity of Loanable funds
Demand of Loanable funds shifters
Changes in beliefs of rate of return (direct) Changes in give borrowing (direct) Crowding out (inverse)
Supply of Loanable funds shifters
Private savings change (direct) Capital inflow (direct)
Fisher effect
An increase in expected future inflation drives up the nominal interest rate by the same number of points leaving expected and real the same
If interest is up a bond costs
More
If interest rates are low then bonds
Are cheap
