Week 7 - Money, the federal reserve, and monetary policy

Question 1

what is money?

Answer 1

money is:

- a medium of exchange, a unit of account, and a store of value

Question 2

what is included in M1 & M2?

Answer 2

M1: demand deposits + currency + other checkable deposits, + traveler’s checks

M2: less liquid assets; everything included in M1 plus a short list of assets including: certificates of deposit and time of deposits

Question 3

what is the basic structure of the federal reserve

Answer 3

*see homework

Question 4

how does the fed control monetary supply and interest rates?

Answer 4

the Fed has purchased treasury bonds from banks who will then use that money to loan to people. As a result, this lending of money will lower interest rates, the cost of money which will stimulate the economy and raise GDP

Question 5

what is prime rate?

Answer 5

the rate given to consumers for consumer loans

Question 6

what is the discount rate?

Answer 6

the rate the fed charges banks to borrow from them

Question 7

what is the fed funds rate?

Answer 7

a market controlled rate that banks charge one another