AP Macroeconomics Monetary Policy (Quiz)

Medium of Exchange

Medium of Exchange

A function of money that makes it useable for buying goods/services (replaces bartering)

Unit of Account

A function of money that allows it to be measured for its relative worth of goods and services

Store of Value

A function of money that allows it to be able to transfer purchasing power from present to future

M1

All currency that is in public hands, such as coins and paper money, and all "checkable deposits" in commercial banks and savings institutions

Checkable Deposits

Money in checking accounts (largest component of M1), can be converted to paper money or coin "on demand"

M2

Includes all of M1 + liquid financial assets that dont function directly as money, but can be converted easily

Saving Deposits

Part of M2, includes saving accounts, money market deposit accounts, and MMDA

Small Time Deposits

Less than 100k, Certificates of Deposit (CD) and other timed assets

Money Market Mutual Funds

Investors pool money and purchase long and short term credit investments, like CD and US Govt. Securities

Commercial Banks

Large depository institutes that accept household and buisiness deposits. Keep money safe and make loans

Thrift Institutions

Saving and loans, mutual savings banks, and credit unions

S&Ls / Savings Banks

Type of Thrift Institution, Accepts deposits of households and buisinesses, finance mortages and loans

Credit Unions

A "bank" that isn't a corporation, and is owned by its members and not stockholders

Credit Cards

Not money, but considered a "short term loan"

Money's Value

Nothing backs the money supply, backed only by government's ability to keep value of money relatively stable

Acceptability

Currency & Checkable deposits are money because people accept it as money

Legal Tendor

U.S Govt declared that paper currency be accepted as payment of debt, CANNOT be redeemed for precious emtal of other specie

Fiat Money

Money is money only because the government says so. Intrinsically worthless

Durability

Characteristic of Money, must be able to withstand repeated transactions

Portability

Characteristic of Money, must be able to move about easy.

Divisibility

Characteristic of Money, Must be able to be broken into smaller amounts easily.

Uniformity

Characteristic of Money, Must be the same regardless of other characteristics (Dollar is a dollar, whether you are buying pencils or pizza)

Scarcity

Characteristic of Money, Limited supply

Acceptability

Characteristic of Money, We accept it because we can spend it elsewhere

Commodity Money

Any object that has value in and of itself (ex

Representative Money

Objects having value because holder can exchange them for something else of value (Checks or bonds). (Ex

Federal Reserve System

Created in 1912/1913 after collapse of 1907 (JP Morgan's "Reserve Rescue") to maintain stability of the economy, control the money supply (of M1s and M2s), and to promote economic growth

Structure of Federal Reserve

12 Reserve Banks across US, 7 Goveners w/ 14 year terms, Chariman w/ 4 year term appointed by President with Senate approval.

FDIC

Controls all member banks, insures banking deposits

FOMC

Buys and sells U.S Bonds

FED Tools

Target the Fed Fund Rate, Change discount rate, Set Reserve Requirement, Payroll agent for US Govt., Buy and Sell US Bonds and Securities, Regulate and oversee member banks, Printing and distributing US Currency

Federal Funds Rate

Lowest Rate, The rate at which FDIC banks loan funds to eachother OVERNIGHT to balance their banks

Prime Rate

Middle Rate, The rate at which banks charge most credit worthy ("Prime") customers (those who are more likely to pay back, usually richer). Usually 3% above Fed Funds (if Fed Funds Rate 3%, then Prime Rate is 3.09%)

Discount Rate

HIghest Rate, AKA "Rate of Last Resort". If a bank is in trouble and cant get funds or prime rate, it has to go to Federal Reserve directly to borrow

Transactions Demand

Money kept for purchases (mortages and groceries for households, labor and supplies for buisiness). Higher GDP = Larger Transactions Demand. Graphed as vertical line regardless of IR

Asset Demand

Money kept as "store of value" for later use (price of "holding money". Inversely relateed to interest rate (Top left to bottom right). Low IR means public holds more money as assets, and high IR means people hoard their money

Total Demand for Money

Sum of Transaction Demand and Asset Demand

Bond

Financial transaction where govt agency/corporation agrees to pay a fixed amount of interest and principal at a fixed time for a current purchase ("Buying Money")

Interest Rates

Fed controls the interest rates, they can increase or decrease via Monetary Policy actions

Tight Money Policy

Quantity of Money Demanded > Quantity of Money supplied (People sell off assets, bond supply increases, bond prices fall, IR rises, less money in economy), shift Supply to the left

Tight Money Rule of Thumb

Lower bond prices associated with higher interest rates

Easy Money Policy

Quantity of Money Supplied > Quantity of Money Demanded (People buy bonds to get rid of money, demand for bonds rises, bond prices rise, IR falls, surplus of money and more money in economy), shift Supply to the right

Easy Money Rule of Thumb

Higher bond prices are associated with lower interest rates