Macroeconomics chapter 14 Money, banks, and the federal reserve system – Flashcards
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Any asset that people are generally willing to accept in exchange for goods and services, or for payment of debts.
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Money
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Anything of value owned by a person or a firm.
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Asset
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Trading between two persons whose disposable possessions mutually suit each other's wants.
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Double coincidence of wants.
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Goods used as money that also have value independent of their use as money—like animal skins or precious metals.
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commodity money
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Medium of exchange- acceptable to a wide variety of parties Unit of account- A way of measuring value Store of value- Allows people to save
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Three Primary Functions of Money
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1. Acceptable to most people 2.standardized quality so any two units are alike. 3.durable so that value is not lost by storage. 4.valuable relative to its weight, so that it can easily be moved in large quantities. 5.divisible because different goods are valued differently.
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What does money need to be to be acceptable
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Central Bank of the U.S.
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Federal Reserve
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refers to any money, such as paper currency, that is authorized by a central bank or governmental body, and that does not have to be exchanged by the central bank for gold or some other commodity money.
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Fiat money
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(mostly used) -The sum of currency in circulation -Checking account deposits in banks -Travelers checks
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M1
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Includes M1, plus: -Savings account balances -Small-denomination time deposits -Balances in money market accounts -Non-institutional money market fund shares.
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M2
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No, They represent the money in the checking/savings account
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Do credit cards represent money?
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Deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve
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Reserves
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Bank must keep some cash available for its depositors, amount is based on checking acct deposits
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Required reserves
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The minimum fraction of deposits banks are required by law to keep as reserves
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Required Reserve Ratio
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Reserves over the legal requirement
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Excess reserves
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The ratio of the amount of deposits created by banks to the amount of new reserves.
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The simple deposit multiplier
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If many banks simultaneously experience bank runs
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A Bank panic
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Loans that the Federal Reserve makes to banks
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Discount loans
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The interest rate that the federal reserve charges on discount loans
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Discount rates
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Insures deposits in many banks, up to a limit (currently $250,000). Helps prevent bank panics
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Federal Deposit Insurance corporation (FDIC)
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Conducts America's monetary policy: the actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives.
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The Federal Open Market Committee (FOMC)
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Refers to the buying and selling of Treasury securities by the Federal Reserve in order to control the money supply.
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Open market operations (most common)
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Fed buys U.S treasury securities
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How does Fed increase money supply
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Fed sells its securities
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How does Fed decrease money supply
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Banks that do not typically accept deposits from or make loans to households; they provide investment advice, and engage also engage in creating and trading securities such as mortgage-backed securities.
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Investment banks
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Funds that sell shares to investors and use the money to buy short-term Treasury bills and commercial paper (loans to corporations).
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Money market mutual funds
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Funds that raise money from wealthy investors and make "sophisticated" (often non-standard) investments.
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Hedge funds
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Financial crisis
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There is a connection between the amount of money in circulation and the price level.
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Quantity Theory of money (Long run)
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The average number of times each dollar in the money supply is used to purchase goods and services included in GDP
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Velocity of money
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V=PxY/M
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Equation for velocity of money
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1.The money supply (M) with M1, 2.The price level (P) with the GDP deflator, and 3.The level of real output (Y) with real GDP,
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Calculating the velocity of money measuring
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Growth rate of money supply - Growth rate of real output
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Inflation Rate
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Growth rate of money supply+Growth rate of velocity= Growth rate of the price level(or inflation rate)+ Growth rate of real output
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Quantity Equation
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1. If the money supply grows faster than real GDP, there will be inflation 2. If the money supply grows slower than real GDP there will be deflation (a decline in the price level) 3. If the money supply grows at the same rate as real GDP, there will be neither inflation nor deflation: the price level will be stable
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Money supply and Inflation
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Very high rates of inflation—in excess of 100 percent per year, results when central banks increase the money supply at a rate far in excess of the growth rate of real GDP.
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Hyperinflation
