Unit 6 Flashcards
What is The Nominal Interest Rate
is the interest rate banks charge people and businesses.
What is The Real Interest
is the profit people or banks make on savings, bonds or loans.
Formula for real interest rate
Nominal interest rate - inflation
The Quantity Theory of Money states
GDP = The money supply x The Velocity of Money
The Velocity of Money measures
how often money is spen
Monetary Base is
Printed bills, minted coins and required reserves sitting in bank
M1 is
= MB + checking account deposits + Traveler’s checks
money you can spend right now and is circulating in the economy.
Money Supply in the banking system
= Bank deposits - Required reserves.
Is the money banks have available to loan out.
M2 is
Savings accounts, stocks, bonds, CDs, mutual funds. Is money that can’t be spent right now and isn’t circulating in the economy.
the Transactions demand for money is
how much people keep in M1
Money Multiplier
= 1/reserve requirement x deposit OR 1/reserve requirement x excess reserves
Reserve Requirement
is the percent of deposits banks must keep on reserve. Typically 10% of checking account
Whats the discount rate
the interest rate the FED charges banks to borrow. When the discount rate changes every interest rate changes
Open Market operations
the FED buys bonds from and sells bonds to banks to increase or decrease the amount of loanable funds banks have.
To increase the money supply the FED will
lower the reserve requirement, lower the discount rate and buy bonds.
