Unit 4 ECON 2105

Money Supply

Money is a widely accepted means of payment used for small transactions.

Total Reserves

Reserves held by banks at the Federal Reserve System, crucial in the financial system.

Checkable Deposits

Deposits accessible via checks or debit cards, used for daily transactions.

Liquid Asset

An asset easily convertible into a means of payment without loss of value.

Monetary Base

Currency and total reserves held at the Fed, directly controlled by the Fed.

Fractional Reserve Banking

Banks hold a portion of deposits in reserve and lend the rest.

Reserve Ratio

Ratio of reserves to deposits, influencing the money multiplier.

Money Multiplier

Ratio of deposits to reserves, determining the money supply expansion.

Open Market Operations

Buying and selling of short-term U.S. government bonds to control the money supply.

Quantitative Easing

Fed buys longer-term government bonds to increase reserves and influence the money supply.

Federal Funds Rate

Overnight lending rate between major banks, controlled by the Fed.

Liquidity Trap

Situation where interest rates are close to zero, limiting the Fed's control over the money supply.

Lender of Last Resort

The Fed provides liquidity to financial institutions during crises to prevent systemic risks.

Moral Hazard

Risk that insured individuals or institutions take on excessive risks due to protection against losses.

Aggregate Demand

The total demand for goods and services in an economy, influenced by the money supply.

Board of Governors

Seven-member board overseeing the Fed, appointed by the president and confirmed by the Senate.

Federal Reserve Banks

12 regional banks forming the Federal Reserve System, influencing monetary policy.

Functions of Money

Money serves as a medium of exchange and a unit of account in the economy.

Store of value

Money can be saved for future use.

Small change

Currency small enough for everyday transactions and convertible to legal tender with more than local circulation.

First Bank of the U.S.

Established in 1791 with a 20-year charter, partially owned by the federal government, and serving as a fiscal agent and commercial bank.

Second Bank of the U.S.

Similar to the first bank, established in 1816 and regulated the money supply.

Panic of 1907

Financial crisis triggered by the collapse of the Knickerbocker Trust Co., leading to a panic where regional banks withdrew reserves from NY banks.

Federal Reserve System

Established in 1913, it acts as America's central bank, managing the U.S. Treasury account, regulating banks, and controlling the money supply.

Money

Widely accepted means of payment including currency, total reserves, liquid deposits, money market mutual funds, and small time deposits.

Board of Governors

Seven-member board appointed by the president for 14-year terms, overseeing the Federal Reserve System.

Lender of Last Resort

Function of the Federal Reserve to prevent bank runs by providing liquidity to solvent but illiquid banks.

Negative Real Shock Dilemma

Occurs when the economy faces a negative real shock like a rapid oil price increase, leading to challenges for monetary policy in managing inflation and growth.

Rules vs

Debate over whether monetary policy should follow strict rules or discretionary actions based on the imperfections of monetary policy.

Quantity Theory of Money

Equation (Mv=PYr) used to analyze the relationship between money supply (M), velocity (v), price index (P), and real GDP (Yr).

Nominal GDP Rule

Strategy to keep Mv constant, aiming for stable nominal GDP growth, often advocated for its potential to mitigate economic downturns.

Reserve Ratio

Ratio of bank reserves to deposits, influencing the money multiplier and determining the amount the money supply expands with each dollar increase in reserves.

Open Market Operations

Tool used by the Fed to control the money supply by buying or selling government bonds, impacting interest rates and stimulating economic activity.

Quantitative Easing

Strategy involving the purchase of longer-term government bonds to increase reserves and lower interest rates, especially during economic crises.

Payment of Interest on Reserves

Method used by the Fed to influence lending and aggregate demand by adjusting the interest rate paid on reserves held by banks.

Lender of Last Resort

Role of the central bank in providing emergency liquidity to financial institutions during crises to maintain stability in borrowing and lending.

Federal Reserve (Fed)

The central banking system of the United States responsible for creating money, regulating the money supply, and influencing aggregate demand through various monetary policy tools.

Aggregate Demand (AD)

The total demand for goods and services within an economy at a given time, influenced by factors like consumption, investment, government spending, and net exports.

Open Market Operations

The Fed's monetary policy tool involving the buying and selling of government bonds to control the money supply and interest rates.

Lender of Last Resort

The role of the Fed as a source of liquidity for financial institutions during times of financial crisis.

Monetary Policy

The actions taken by the Fed to manage the money supply, interest rates, and overall economic activity to achieve macroeconomic goals.

Real Shock

A negative external event, such as a rapid oil price increase, that impacts the economy's long-run aggregate supply curve and poses challenges for monetary policy.

Market Confidence

The belief and trust of investors and consumers in the stability and growth of the economy, influenced by the Fed's ability to shape expectations and boost confidence.

Nominal Wage Flexibility

The ability of wages to adjust quickly to changes in economic conditions, crucial for managing inflation and unemployment during disinflation.

Asset Price Bubbles

Situations where the prices of assets, like housing, rise rapidly and unsustainably, leading to economic imbalances and potential crises.

Rules vs

The debate over whether the Fed should follow consistent monetary rules or have discretion to adjust policy based on economic conditions, impacting the effectiveness of monetary policy in stabilizing the economy.

Full Employment

When the economy is at full employment, additional spending does not significantly increase output.

Crowding Out

The decrease in private spending that occurs when government spending increases.

Multiplier Effect

The additional increase in spending caused by the initial increase in government spending.

Ricardian Equivalence

When lower taxes today lead to higher taxes in the future, causing individuals to save tax cuts instead of spending them.

Automatic Stabilizers

Changes in fiscal policy that stimulate aggregate demand during a recession without explicit action by policymakers.

Effectiveness Lag

The time it takes for fiscal policy to have an impact on the economy.

Counter-Cyclical Fiscal Policy

Government spending more during a recession and less during economic booms to stabilize the economy.

Real Shock

A decrease in productivity that shifts the long-run aggregate supply curve to the left, impacting the effectiveness of fiscal policy.

Public Choice

The study of political behavior using economic tools.

Rationally Ignorant

When individuals choose not to be informed about political matters due to low incentives.

Diffuse Costs, Concentrate Benefits

A formula for political success where costs are spread out while benefits are concentrated.

Concentrated Costs, Diffuse Benefits

A formula where costs are focused on a few individuals while benefits are spread out, leading to potential government failures.

Diffuse beneficiaries

Individuals more likely to vote on general rules than to engage in specific proposal discussions at review boards

Voter Myopia

Voters' tendency to focus on current economic conditions rather than long-term trends

Median Voter Theorem

Theory stating that the policy closest to the ideal point of the median voter wins in a majority-rule election

Rational Ignorance

Concept where individuals choose not to be informed about political matters due to low benefits of being informed

Concentrate Benefits, Diffuse Costs

Strategy where politicians garner support by concentrating benefits on a few while spreading costs across many

Democracy and Famine

Notion that famines are less likely in functioning democracies due to better responsiveness to crises

Economic Freedom, Democracy, and Living Standards

Correlation between democracy, economic freedom, and high living standards

Quotas

Restrictions on the quantity of imported goods, affecting consumer and producer surplus

Two Cheers for Democracy

Special interests likely to influence policies specialized in impact, while voters engage in visible and impactful policies

Democracy and Growth

Democracies support institutions promoting economic growth through market, property rights, and fair government.