AP Macro (31, 23, 33)

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Description and Tags

47 Terms

1

medium of exchange

socially acceptable and acts as an intermediary in the exchange of goods and services

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2

unit of account

it is a “yardstick” for measuring the relative worth of a variety of goods. Used to compare the worth of one good vs. another

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3

M0

  • currency in circulation

  • reserves of banks

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4

M1

  • currency in circulation

  • checking accounts/demand deposits

  • savings accounts

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5

M2

  • includes M1

  • money market accounts

  • Small time deposits - certificates of deposits (CD’s) less than $100,000

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6

M3

  • includes M2

  • large time deposits more than $100,000

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7

Value of a dollar/purchasing power

inverse relationship - price level up - purchasing power down

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8

transaction demand

varies directly with GDP - primary function - medium of exchange - money needed to purchase a certain level of GDP

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9

money demand shifters

  • changes in price level

  • changes in RGDP/spending (C+I+G)

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10

demand pull inflation (money market)

the FED would decrease the money supply from MS1 to MS3 to increase I-rates to decrease borrowing/spending and thus AD

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11

recession (money market)

the FED would increase the money supply from MS1 to MS2 to decrease I-rates to increase borrowing/spending and thus AD

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12

inverse

relationship between bond prices and interest rates

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13

Rate of Return equation

fixed dividend/bond price

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14

future value of money equation

$(1+r)

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15

present value of money equation

$/(1+r)

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16

fractional reserve system

banks only keep a fraction of their deposits on reserve at any time

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17

money multiplier

1/RRR – The multiple by which a single commercial bank can increase the money supply out of its excess reserves.

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18

currency drains

people hold on to cash

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19

excess reserves

The amount by which a bank's actual reserves exceed its required reserves. This is typically the amount of money banks can loan out

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20

asset demand

The amount of money people want to hold for use as a store of value

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21

demand deposit

Any deposit into a financial institution against which a check can be written – also known as a demand deposit.

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22

required reserves

The amount that banks must hold to meet the legal reserve requirement.

  • = total reserves x required reserve ration

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23

required reserve ratio

The fraction of checkable deposits a financial institution must hold in reserve. The percent is set by the Federal Reserve.

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24

total/actual reserves

The amount that banks are currently holding in reserve. Can be excess or required.

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25

excess reserves

The amount by which a bank's actual reserves exceed its required reserves. This is typically the amount of money banks can loan out.

  • total reserves - required reserves

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26

change in money supply

= excess reserves x 1/RRR

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27

Total amount demand deposits

= change in money supply + initial demand deposit

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28

Monetary Policy

A central bank’s changing of the money supply to influence interest rates to achieve the economic goals of price level stability and full employment.

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29

Three tools of monetary policy

  • Open Market Operations

  • Reserve Ratio

  • Discount Rate

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30

OMO - Buy

Buying securities/bonds - expands the money supply (FED buys: commercial banks sell)

  • do this in a recession to lower I-rates, which increases borrowing/spending thus increasing AD to fix low RGDP

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31

OMO - Sell

Selling securities/bonds - decreases the money supply (FED sells: commercial banks buy)

  • do this during periods of demand-pull inland to raise I-rates, which decreases borrowing/spending thus decreasing AD to fix a high price level. This also decreases the price of bonds in the bond market

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32

Raising RRR

banks must hold more required reserves; money supply decreases (during inflation)

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33

lowering RRR

banks may hold less required reserves; money supply increases (during recession)

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34

discount rate

The interest rate the Federal Reserve charges member banks for loans and also the rate the FED pays banks to keep money on reserve at the FED.

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35

federal funds rate

The interest rate banks charge one another on overnight loans.

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36

prime lending rate

the rate banks charge their best customers

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37

Quantity theory of Money

The formula pure monetarists use to support their argument that the quantity of money determines the value of money. (M * V) = (P * Q)aka nominal GDP

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38

Major shifters money supply

  1. OMO - Buy/sell bonds

  2. RRR

  3. discount rates

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39

major shifters demand

  1. Price level up = demand up

  2. RGDR/income up = demand up

  3. fiscal policy/deficit spending up = demand up

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40

nominal I-rate

= real + expected rate of inflation

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41

real I-rate

= nominal - expected rate of inflation

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42

loanable funds market

the hypothetical market for a loan or borrowed $/funds. Axis is labeled real interest rate because the financial institutions are concerned about what the real purchasing power of the money is

  • supply curve shifters: depositors - households, foreign investors, savers/bond issuers

  • Demand curve shifters: anyone who seeks a loan/borrowing money/bond issuers

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43

Depreciate

expansionary monetary policy causes a countries currency on the foreign exchange market to…

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44

appreciate

contractionary monetary policy causes a countries currency on the foreign exchange markets to…

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45

expansionary monetary policy

When the central bank increases the money supply through buying bonds, decreasing the reserve requirement or lowering the discount rate.

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46

contractionary monetary policy

When the central bank decreases the money supply through selling bonds, increasing the reserve requirement or increasing the discount rate.

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47

Crowding out

when fiscal policy is used rather than monetary policy. Increase government spending and decrease taxes. Run a deficit. Potentially keeps us in recession

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