Macroeconomics-Money and Prices in the Long Run

Money

any asset that is a medium of exchange, a unit of account, and a store of value

Medium of exchange

item that buyers can use to purchase goods and services

Unit of account

yardstick used to establish the value of different goods and services

Store of value

item that people can use to transfer purchasing power from the present into the future

Wealth

describes all the different stores of value in an economy

Liquidity

measure of the ease with which an asset can be converted into the economy’s medium of exchange; currency is the most liquid, real estate is much less liquid

Commodity money

item with some intrinsic value that is used as money

Fiat money

item with no intrinsic value that is used as money

Currency

includes paper bills and coins in the hands of the public

M1

currency, savings deposits, demand (checking deposits), other checkable deposits

M2

everything in M1 plus small denomination time deposits and retail money funds

Credit cards

not part of the stock of money, reduces the economy’s need for money

Federal Reserve System

central bank of the United States; consists of twelve regional banks, run by a board of seven governors, acts as a lender of last resort

Central bank

institution created to oversee the banking system and regulate the supply of money

Federal Reserve Board

runs the Fed; consists of seven governors who are appointed by the president, confirmed by the Senate, and serve fourteen year terms

Twelve regional banks

oversee commercial banks and facilitate transactions by clearing checks, make loans to banks

Money supply

quantity of money in the economy

Federal Open Market Committee

controls the money supply; consists of the seven governors of the Fed and five regional bank presidents

Administered rates

interest rates that the Fed sets to affect the Fed funds rate, includes interest on reserve balances rate and the discount rate

Ample reserve policy

the use of the Fed’s administered rates to affect the Fed funds rate and overall financial conditions; official monetary policy of the US since 2008

Limited reserve policy

the use of the required reserve ratio, the discount rate, and open market operations by the central bank to manage the money supply in order to affect overall financial conditions

Open market operations

the buying and selling of government securities through primary dealers by a central bank in order to influence the money supply

Reserves

the money a bank keeps in the vault, used to pay its depositors

Money multiplier

the amount of money the banking sector creates from each dollar of reserves

Monetary base

aka high-powered money; the amount of currency plus reserves

Limited reserve system

banking system where the banks are required to hold a specified amount of reserves

Federal funds rate

the rate charged by banks when they lend reserves to other banks

Discount rate

interest rate that the central bank charged on loans that it makes to banks

Bank run

rush of withdrawals

Solvent

when a banks assets exceed its liabilities

Demand for money

depends on how much of their wealth people wish to hold as money

Neutrality of money

changes in the quantity of money have no effect on real quantities in the economy, on affects nominal quantities

Real quantities

things that are measured in physical units

Nominal quantities

things that are measured in monetary units

Velocity of money

average number of times a typical dollar bill is used during a year; V=(P*Y)/M, V*M=nominal GDP

Effects of inflation

reduces the value of money, introduces distortions into pricing, creates confusion about the true value of goods and services