Monetary Policy Unit 4 Test Review Flashcards

Vocabulary flashcards covering the key concepts of Monetary Policy, including money definitions, the fractional reserve system, Fed tools, and interest rate equations.

Value of Money

Money has value because people accept it in exchange for things. For example, in Gilmore Girls, Lorelai pays for coffee at the diner with cash, showing money's role as a medium of exchange.

Functions of Money

Money serves three main purposes: 1. Medium of Exchange (like paying for a meal at Luke's), 2. Store of Value (savings in the bank), and 3. Unit of Accounting (prices of items, like the cost of a dress at the Stars Hollow Boutique).

M1

This includes physical cash, checkable deposits, and traveler's checks. For instance, when Rory pays for school supplies, she's using M1 money.

M2

M2 includes M1 plus savings accounts and money market accounts, similar to Rory saving money in a bank for her future education.

M3

M3 is M2 plus larger time deposits. Consider it like a family saving money for a big trip to Europe, gathering more than just what's in their savings account.

Near Monies

Near monies are forms of savings that can be easily converted to cash. Think of it like Rory’s scholarship funds that can be turned into cash for college expenses.

Equation of Exchange

The formula $MV = PQ$ explains how money supply affects price levels in an economy. In the show, when Lorelai spends more money to renovate the inn, it can increase overall spending in the local economy.

Velocity of Money (V)

This refers to how quickly money circulates. For example, if Luke buys ingredients for his diner frequently, the money he spends keeps moving around the economy.

Fractional Reserve System

This system allows banks to lend out most of the deposits while keeping a fraction. It’s like when Lorelai pays a smaller deposit to secure a fun event at the inn.

Required Reserve

Banks must keep a percentage of deposits, not lending it out. Picture it like Rory needing to keep a portion of her allowance for an important event instead of spending it all.

Excess Reserve

This is what banks have in excess of their required reserves, like Rory saving extra money for an unexpected adventure.

Deposit Expansion Multiplier

This multiplier calculates how much money can grow through bank lending, similar to how the town of Stars Hollow grows with each new shop opening.

Discount Rate

This is the interest banks pay to borrow from the Fed. Imagine if Luke needed to borrow money quickly; the cost of that interest is his discount rate.

Open Market Operations

This is when the Fed buys or sells government securities. It's like when Lorelai sells shares from the inn for extra cash flow.

Nominal Interest

The interest rate seen daily including inflation. Think of it like how much Rory pays on her credit card with interest included.

Real Interest

This interest rate excludes inflation and shows true cost. It’s comparable to how much Rory effectively pays on her loans considering rising prices.

Fisher Equation

The relationship $ext{Nominal Interest \%} - ext{inflation rate} = ext{Real Interest Rate}$ looks at how much the value of money changes over time.

Loanable Funds Market

This market shows how banks set interest rates based on supply and demand. Picture all the young people in Stars Hollow needing loans for their new businesses.

Crowding Out

This happens when high government borrowing raises interest rates, making it harder for private investments to succeed, like when a new cafe opens and takes all the customers from Luke's.

Easy Money Policy

A policy where the Fed increases money supply by buying bonds. Imagine if Lorelai got a huge cash influx for the inn to renovate and expand.

Tight Money Policy

A policy where the Fed reduces money supply by selling bonds. Comparable to when Lorelai has to cut back spending during lean years at the inn.