Money Supply and the Federal Reserve
Terms
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Anything that is generally accepted as a medium of exchange
- Money
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One of the three functions of Money
What sellers generally accept and buyers generally use to pay for goods and services
- Medium of exchange
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One of the three functions of money
An asset that can be used to transport purchasing power from one time period to another
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A store of value
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One of the three functions of money
A standard unit that provides a consistent way of quoting prices
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Unit of account
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The property of mone that makes it a good medium of exchage as well as a store of value
It is portable and readily accepted and thus easily exchanged for goods
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Liquidity property of money
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The ability in which assets can be converted to cash
- Liquidity
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Items used as money that also have intrinsic value in some other use
Cigarrettes and gold chains
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Commodity monies
- Items designated as money that are intrinsically worthless
- Flat/token money
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Money that a government has required to be accepted in settlement of debts
- Legal Tender
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The decrease in the value of money that occurs when its supply is increased rapidly
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Currency debasement
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Money that can be directly used for transactions
- Transaction money (M1)
- Any deposit account with a bank or other financial institution on which a check can be written
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Checkable deposits
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Checking accounts that pay interest
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NOW accounts
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Automatically transfer funs from saving to checking when balance on one of those accounts reached a predetermined level
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Automatic-transfer saveings (ATS)
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Transaction savings accounts, money market accounts, and other near monies
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Broad Money (M2)
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C^p (cash held by the public)+ DD (Demand Deposits)
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Transaction Money (M1)
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Occurs when many of those who have claims on a bank (deposits) present them at the same time
- Run on the Bank
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Assets - liabilities
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Net Worth
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The central bank of the United States
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The Federal Reserve Bank (the Fed)
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the deposits that a bank has at the Federal Reserved bank plus its cash on hand
- Reserves
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The percentage of its total deposits that bank must keep as reserves at the Federal Reserve
- Required reserve ratio
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The difference between banks actual reserves and its required reserves
Money used for loans
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Excess Reserves
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Actual reserves - required reserves
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Excess Reserves
- An account allows you to “demand” your money at any time unlike term accounts where the account cannot be accessed for a predetermined period
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Demand Deposits
- The multiple by which deposits can increase for every dollar increase in reserves
- Money Multiplier
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1 / required reserve ratio
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Money multiplier
- C^V (cash at the vault) + Deposits of Federal Reserve Bank
- Reserves
- (1/rr)(DD)
- Required Reserves (RR)
- TR
- Total reserves
- ER
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Excess reserves
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Interest rate that banks pay to te Fed to borrow from it
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Discount rate
- The amount of money in the economy (that is equal to the sum of deposits inside banks and the currency in circulation outside of banks
- Money Supply
- Currency + Deposit
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Money Supply
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Pulbic demands for money
What the public has in its pocket
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Demand Money
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-Facilitate the transfer of funds between banks
-Create regulations and standards that are to be followed by the banks
-Lender of last resort: Provides funds to troubled banks that cannot find any othe -
Functions of the Federal Reserves
- The mismatch between the timing of money inflow to the household and the timing of money outflow for household expenses
- Nonsynchronization of income and spending
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1. The interest rate: r (negative effect causes downward-sloping money demand)
2. Income
3. Price level
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Determinates of Money Demand
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-Buying and selling bonds and the discount rate
-Change in income, and the price level
-Tools of the Feds -
Conditions that cause the MS curve to shift
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If bond prices decrease
- Bond interest increases
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Money Demand also means:
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Money Holding