Money & Monetary Policy Study Guide

A collection of vocabulary flashcards covering key concepts in money and monetary policy.

Medium of Exchange

Accepted as payment for goods and services.

Store of Value

Can be held for future purchases.

Standard of Value

Serves as a yardstick for measuring the prices of goods and services.

Barter System

Direct exchange of one good for another.

M1 Money Supply

The most common definition of money supply, which includes currency in circulation and transaction account balances.

M2 Money Supply

Includes M1 plus time deposits, money market funds, and less used savings balances.

Assets

Items owned by individuals, firms, or governments.

Liabilities

Financial obligations owed by entities to others.

Fractional Reserve Banking

A system in which a fraction of deposits is held in reserve and the rest is loaned out.

Reserve Ratio

The amount of money that needs to stay with the bank.

Federal Reserve System

Consists of 7 board of governors, 12 federal reserve banks, and the federal open market committee

Board of Governers

7 members

14 year term

Set monetary policy

Federal Open Market Committee

Responsible for daily activity in financial markets

All 7 governors + 5/12 (ALWAYS NY) reserve banks presidents

Every 4-5 weeks

Basic Functions of the Federal Reserve System

Clearing house (checks)

Holding Bank Reserves

Issue Currency

Regulatory/ Oversight

Lender of Last Resort

Reserve Requirement Equation

Required Ratio X Total Deposits

Excess Reserves

What banks can loan out

Total Deposit - Reserve Requirement

Lending Capacity Equation

Excess Reserves X Money Multiplier (1/required ratio)

Interest on Bank Reserve Balances (IORB)

A tool used by the FED to regulate the money supply through interest changes.

Discount Rate

The interest rate banks pay to the FED for borrowing reserves.

Open Market Operations

The buying and selling of government bonds by the FED to alter the money supply.

FED Funds Market

FED to Bank Loans Overnight

Dual Mandate of the FED

To maintain stable prices and maximum employment.

Basic tools used by the fed when conducting monetary policy

Reserve Requirements

IORB

Discount Rate

Fed Funds Rate

Open Market Operations

Transactions Demand for Money

Money held for everyday market purchases.

How to increases the Money Supply

Lower Reserve Requirements

Reduce IORB

Lower Discount Rate

FED Buys Bonds

How to decrease money supply

Increase reserve requirement

Increase IORB

Increase discount rate

FED sell bonds

Precautionary Demand for Money

Money held for unexpected market transactions or emergencies.

Speculative Demand for Money

Money held for financial opportunities or investment purposes.

What are the roles of money

Medium of Exchange

Store of Value

Standard of Value

How is money used?

To simplify market transactions

What is the alternative to money

Barter System

What forms of does money take

Debit Cards

Checks

What are the services of payment for money

Credit Card - Only medium of exchange

Venmo, Apple Pay, PayPal

How is the supply of money determined

FED’s power to regulate (vertical line).

Interest rate impacted by change in money supply

Indirect Relationship.

Keynesian Monetary Policy View

Interest Rates impact AD and is the primary affect in money supply

Monetarists View on Monetary Policy

Isn’t an effective tool to manage AD

Inflation will change price level but not necessarily AD

Anticipated inflation (real interest rate will stay stable)