money supply, and fractional reserve banking

what are the 4 tools to control money supply

open market operations (OMO) discount rate, interest excess reserves, reserve requirements

what is commodity money

a type of money that brings value to itself ie wood, steal, not just because its used as a medium of exchange

what is fiat money

type of money that has no intrinsic value and is not back by physical commodity, value comes from government regulations and trust

what is bank money

money that is created by commercial banks in the form of deposits that are held by individuals and businesses, money in bank accounts that individuals can be used for transactions via checks, debit cars or electric transfers, this money is created when banks issue loans thru fractional reserve banking

what is a financial asset

a financial asset is an asset that is given value through a contractual claim and does not have intrinsic value, owner ship or right to receive money in the future

what is the equation to money multiplier, what determines the money multiplier

1/reserve ratio, the size of the reserve determines money multiplier as well as a preference for checking, if people like to use cash there will be less money in banks

what is velocity of money

the rate at which money is used in transactions, or changes hands

equation for money demand

money demand=PxY/V. P= price level( final price of finished goods) Y=real output (real GDP) V= velocity of money

If the government enacts a law that increases the reserve ratio from 10% to 20%, how will this affect the money multiplier?

the money multiplier will lower as the reserve ratio gets lower because banks now have 10% less money to put into fractional banking

If the public begins to hold more cash (increase in currency drain), what happens to the money multiplier?

the money multiplier will lower as banks will have less of a total reserve meaning lower reserve ratio

how does fractional reserve banking work

banks are required to keep a certain reserve on the total money, this is a way banks create money, if you were to put 100 in the reserve rate is 10% they will loan the 90 to another person who brings it to another bank who then loans out 81 to another person and money is created as the loan goes from bank to bank