ap macro money market

Money

Any commodity/token that is generally accepted as a means of payment for goods and services.

Commodity

A good with built-in value.

Token

Currency whose stated value is greater than its built-in value.

three functions of money

medium of exchange, unit of account, store of value

Chairman of the Fed

Directs the Fed staff, presides over board meetings, and testifies about Fed policy in front of Congress committees.

Board of Governors

Seven members appointed by the President and confirmed by the Senate to oversee the Fed.

Federal Open Market Committee (FOMC)

The main policy-making organ of the Fed system that determines monetary policy.

Fractional Reserve Banking

A banking system in which banks are required to keep a fraction of deposits in reserve and can lend out the rest.

Expansionary Monetary Policy

A policy aimed at increasing the money supply and stimulating economic activity.

Contractionary Monetary Policy

A policy aimed at decreasing the money supply to reduce inflation.

Open Market Operations (OMO)

Buying and selling bonds as a tool for monetary policy.

Liquidity

The ease with which an asset can be converted into money.

Asset

required reserves, excess reserves; what the bank owns or is owed (e.g., loans, cash).

Liability

demand deposits; what the bank owes to others (e.g., customer deposits).

Taylor Rule

A rule that adjusts the nominal interest rate based on changes in inflation, unemployment, and GDP.

Money Multiplier

The formula that describes how an initial deposit/reserve leads to an increase in the money supply through the banking system; calculated as 1/reserve requirement.

Liquidity Trap

A situation where interest rates are very low, leading people to prefer holding cash rather than investing.

Required Reserves

The minimum amount of reserves a bank must hold, mandated by the central bank.

Excess Reserves

Reserves held by a bank above the required amount, used to make loans or buy securities.

Actual Reserves

The total reserves held by a bank, including both required and excess reserves.

Money Supply

the total money available in the economy. Including the money in circulation and also the bank deposits, loans, and other forms of creditc

three tools of monetary policy

open market operations, discount rates, reserve requirements

OMOs Expansionary Monetary Policy

buying bonds injects money into the banking system, increasing the reserves of commercial banks. This drives interest rates down and thus encourages lending and spending.

OMOs Contractionary Monetary Policy

selling bonds, pulls money out of the banking system, decreasing the reserves thus driving interest rates up and discouraging lending and spending.

Discount Rates Expansionary Monetary Policy

Lowering DR: Borrowing from the central bank is cheaper for commercial banks, so they are more likely to lend money, increasing the money supply and economic activity.

Discount Rates Contractionary Monetary Policy

Raising DR: Borrowing from the central bank is more expensive for commercial banks, so they are less likely to lend money, decreasing the money supply and economic activity.

Reserve Requirements Expansionary Monetary Policy

Lowering RR: Banks can lend out more of their deposits, thus increasing the money supply and encouraging economic activity.

Reserve Requirements Contractionary Monetary Policy

Raising RR:  Banks must hold more money in reserve, leaving less available for lending. This reduces the money supply and discourages economic activity.

M1

currency, traveler’s checks, demand deposits, other checkable deposits and other liquid assets.

M2

everything in M1, saving deposits, small time deposits, money market mutual funds

M3

M2+Large Time Deposits(Treasury bonds)

What can cause MS curve shifts?

Changes in the OMOs, DRs, RRs

what can cause MD curve shifts?

changes in income

changes in price level

changes in technology (credit cards)

Checkable deposits

deposits in a bank that can be converted into checks, debit cards, or electronic payments. Considered part of the money supply

Commercial banks

financial institutions that accept deposits, making loans, and provide saving accounts and certificates of deposit

Thrift institutions

financial institutions that focus on accepting savings deposits and making loans, primarily for home mortgages. Similar to commercial banks, but with a focus on consumer savings and housing finance.

Near-monies

assets that are highly liquid and can be quickly converted into cash with little or no loss in value (savings accounts, treasury bills, money market deposit accounts)

Money Market deposit Accounts

type of savings account that offers a higher interest rate in exchange for higher minimum balance requirements and limited check-writing privileges

Time deposits

savings accounts that require the depositor to leave the money in the account for a fixed term (such as six months or one year) in exchange for a higher interest rate

TARP

response to the 2008 financial crisis, which resulted from collapses in the housing and banking sectors. The purpose was to stabilize the financial system, restore confidence in the markets, and prevent a bigger economic collapse. This was done by providing the US Treasury with the authority to purchase/insure troubled assets from banks.