Macroeconomics Unit 4

Medium of Exchange

Money can easily be used to buy goods and services with no complications of barter system.

Unit of Account

Money measures the value of all goods and services. Money acts as a measurement of value.

Store of Value

Money allows you to store purchasing power for the future.

Commodity money

Something that performs the function of money and has intrinsic value

Fiat Money

Something that serves as money but has no other value or uses

Checkable Deposit

Accounts where the owner can use or withdraw funds on demand, with no advanced notice

M1 (Highest Liquidity)

1. Currency in circulation

2. Checkable bank deposits (checking accounts)

3. Traveler’s checks

M2 (Near-Money)

M1 plus the following:

1. Savings deposits (money market accounts)

2. Time deposits (CDs)

3. Money market funds

Stocks (equities)

represent ownership of a corporation and the stockholder is often entitle to a portion of the profit paid out as dividends

Bonds (securities)

are loans, or IOUs, that represent debt that the government, business, or individual must repay to the lender

What is the relationship between interest rates and bonds?

Bond price and interest rates are inversely related

Required Reserves

The minimum amount of deposits that banks must hold by law

Excess Reserves

Bank reserves over and above their required reserves. This is the amount they can loan out.

Money Multiplier

1/reserve ratio

Liquidity

The ease in which an asset can be converted into cash without much loss of value

People demand money because..

they need to buy stuff and because its liquid

3 Shifter of Money Supply

Reserve Ratio, Discount Rate, Open Market Operations

Reserve Ratio

percent of deposits banks must hold in reserve

Open Market Operations

The Fed buys or sells bonds (buy bigger, sell smaller)

Discount Rate

The interest rate the Fed charges banks

Interest on Reserves (IOR)

The interest rate that the federal reserve pays commercial banks to hold reserves.

How to change supply with Ample Reserves?

Government can change Interest on Reserves

Loanable Funds

The amount of money that’s available to be loaned out

Shifters of Money Demand

1. Price Level

2. Incomes

3. Technology