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required reserves

minimum amount of reserves a bank MUST hold against its deposits as mandated by the Fed

reserve requirement (ratio)

Fed regulation, requiring a bank to keep a certain percentage of its deposits in its reserve account with the Fed

excess reserves

ny reserves held beyond the required amount

total reserves

sum of the bank’s deposits in its reserve account at the Fed plus its vault cash

if you have a bank account, where is your money

• When the FED increases the money supply it increases the amount of money held in bank deposits.

• As banks keeps some of the money in reserve and loans out their excess reserves

The loan eventually becomes deposits

If there is a recession, what should the FED do to the reserve requirement

decrease the reserve ratio

If there is inflation, what should the FED do to the reserve requirement

increase the reserve ratio

discount rate

interest rate that the FED charges commercial banks

To increase the Money supply, the FED should _________ the Discount Rate

decrease (expansionary)

To decrease the Money supply, the FED should _________ the Discount Rate

increase (contractionary)

open market operations

when the FED buys or sells government bonds

To increase the Money supply, the FED should _________ government securities

buy

To decrease the Money supply, the FED should _________ government securities

sell

GDP

total market value of all final goods and services produced annually within the borders of the US

GNP

total market value of final goods and services produced by U.S. citizens, no matter where in the world they live

consumption

Amounts spent by the household sector

investment

Amounts spent by the business sector

price index

measure of the price level, or the average level of prices

aggregate demand curve

shows the quantity of goods and services that buyers are willing and able to buy at different price levels

aggregate supply curve

shows the quantity of goods and services that producers are willing and able to supply at different price levels

market basket

uses the prices of a sample of representative items whose prices are collected periodically

absolute real economic growth

increase in real GDP from one period to the next

per Capita real economic growth

increase in per capita real GDP from one period to the next

PPF

all possible combinations of two goods that an economy can produce in a certain period of time

monetary policy

changes the Fed makes in the money supply

stagflation

occurrence of inflation and high unemployment at the same time

stop and go, on and off, erratic monetary policy

When the Fed increases the money supply, prices rise. Inflation begins to set in, just as the Fed decides to reduce the money supply