Test 3 Unit 4 The Financial Sector

Opportunity cost of holding money

interest rate

Interest rates

a fee that is paid when money is borrowed/lended out to someone.

Money market

- Quantity of money individuals want to hold is negatively related to interest rate.

Money demand curve

- Relationship between the quantity of money demanded and the interest rate.

Shifts of the money demand curve

• Changes in aggregate price level

• Changes in real GDP

• Changes in banking tech

• Changes in banking institutions.

Money supply curve

- Relationship between the quantity of money supplied and the interest rate.

Shifts of the money supply curve

- Only the federal reserve.

Open market operations

- The Fed buys or sells bonds to inject money into the banking system.

Discount rate

- The Fed changes the interest rate it charges banks for short-term loans.

Reserve requirements

- The Fed alters the percentage of deposits banks must hold in reserve.

Expansionary monetary policy

- Increases amount of money in circulation. Buy bonds.

Contractionary monetary policy

- Decreases amount of money in circulation. Sell bonds.

Federal funds rate

- interest rate that banks charge other banks for loans.

Loanable funds market

- describes the behavior of savers + borrowers

Demand for loanable funds

- The quantity of credit (loans) wanted and needed at every real interest rate by borrowers in an economy.

Real interest rates ⬆ investment ⬇

Real interest rates ⬇investment ⬆

Shifts of the demand for loanable funds

- Changes in perceived business opportunities, investment tax credit, changes in gov borrowing, crowding out.

Crowding out

- Gov drives ⬆the interest rate, hence investment spending goes 📉

Supply of loanable funds

- The idea that lending becomes more attractive at higher 📈interest rates, leading to a 📈higher supply of loanable funds.

Shifts of the supply for loanable funds

- changes in private savings behavior, changes in capital inflow.

Liability

Represents a risk; something you have to pay back (owe)

Asset

Represents something that could make you money; has value (own)

Required Reserve

The money from the reserve ratio placed in the vault or at the district Fed. This is part of the monetary base, not the money supply 

Excess Reserve

Bank’s reserves over and above its required reserves.

Required Reserve Ratio

It is the percent that banks must have in their vaults. The percentage is set by the Federal Reserve.