The Money Supply and the Federal Reserve System

These flashcards cover key concepts from the Money Supply and the Federal Reserve System lecture, helping students review essential terms and theories.

What are the four main functions of money?

A medium of exchange, unit of account, store of value, and standard for deferred payments.

What is the primary reason individuals hold money according to Keynes?

For the transaction motive, to purchase goods and services.

Define 'narrow money'.

Includes items that can be spent directly, such as cash and current accounts.

What does 'broad money' include?

Includes deposits and savings accounts that cannot be spent directly but can be converted into cash.

What is the equation of exchange?

M x V = P x Y, where M is the money supply, V is the velocity of circulation, P is the price level, and Y is real output.

What is a bank run?

When most or all depositors withdraw their deposits due to rumors or loss of confidence.

What are the characteristics of money?

Acceptable, scarce, difficult to counterfeit, stable, divisible, and portable.

What is the role of the Central Bank?

To control the money supply, implement monetary policy, and support commercial banks.

What are the three tools of monetary policy?

Required Reserve Ratio (RRR), Open Market Operations, and Discount Rate.

How do banks create money?

By accepting deposits and loaning out excess reserves at a higher interest rate.

What is 'liquidity preference theory'?

Keynes' theory that individuals hold money for transaction, precautionary, and speculative motives.

Differentiate between required reserves and excess reserves.

Required reserves are the minimum reserves a bank must hold, while excess reserves are those above the legal requirement.

What happens to the money supply when the required reserve ratio is decreased?

It expands because banks can lend more.

What is 'deposit insurance'?

A system to protect depositors and promote stability in the financial sector.

Explain the concept of 'velocity of money'.

The average number of times each dollar is used to purchase goods and services.

What is the primary function of commercial banks?

To create credit by accepting deposits and loaning them out.

What occurs during expansionary monetary policy?

Increased money supply to stimulate aggregate demand.

How might a bank failure occur?

When a bank cannot meet its obligations to depositors or creditors due to insolvency.

Describe the 'speculative motive' for holding money.

Holding money to benefit from the changing market values of interest-bearing bonds.

What does the money multiplier represent?

The factor by which an increase in reserves will increase the money supply.