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Function of money (1/3)
Medium of exchange, buy things
Function of money (2/3)
Store of value, holds purchasing power over time
Function of money (3/3)
Unit of account/ standard of value, used as a measure to set prices
M1, liquid assets
Paper currency, coins, demand deposits, traveler’s checks
M2, M1 + additional less liquid assets
Savings and small time deposits, money market shares
Money multiplier
1/RR
1/RR
How much money is created through the entire banking system
Change in MS
1/RR x Excess reserves
Change in demand deposits
1/RR x initial demand deposit
Change in MS
1/RR x initial deposit of Fed
RR
DD x Req reserve ratio
What makes up the money supply
Money in circulation, demand deposits, savings account
What makes up the monetary base
Money in circulation, reserves, reserves in Fed vault
Who can change the monetary base?
Fed
Who can increase the money supply?
Banks by making loans
Max change in MS from OMO
1/RR x OMO
Assets
Stocks, bonds, loans issued to others, reserves, vault cash, fed reserve notes
Liabilities
Bank deposits (checkable/demand deposits), net worth, loans
Characteristics of the money market graph
nominal interest rate on y-axis, Qmoney on x-axis, vertical MS, downwards sloping MD
What shifts the MD?
Inc in PL, inc in NGDP, technology
What shifts the MS?
OMO, discount rate, reserve requirement
What decreases MD?
Inc savings, inc use of credit card, dec consumer confidence
Motives for holding money
Transaction demand, precautionary demand, speculative demand
Q of money on money market graph is equal to ___ and ____
M1, liquidity
Characteristics of the loanable funds market graph
real interest rate on y-axis, Q of loanable funds on x-axis, upwards sloping Slf, downwards sloping Dlf
3 tools of monetary policy
Reserve requirement, discount rate, open market operations
If money supply shifts, what else will shift?
Supply of loanable funds
Which two rates move in the same direction?
Nominal and real interest rates
What increases the Dlf
Inc gov spending
What happens when banks cannot meet a reserve requirement?
Call in loans from customers, sell assets (ex. bonds), borrow from Fed, borrow from commercial banks
Why is the supply of reserves vertical
Determined by open-market operations
Who decides monetary policy?
The Fed
Fiat money
Exists by government decree, not physical
What are on the axes for the reserve market graph?
Policy rate on the y-axis, Q of reserves on the x-axis
A
High policy rate, loans from bank-to-bank are low
B
Low policy rate, banks will inc demand for reserves at lower interest rates
C
Zero bound reserve requirement
What are the two goals of monetary policy?
Price stability, full employment
Assets from the least liquid to the most liquid
House, bonds, savings account, cash
Which of the following is included in the monetary base?
Currency held by the public and commercial bank reserves held with the central bank
Why is the amount predicted by the value of the simple money multiplier potentially overstated?
It does not take into account a bank’s desire to hold excess reserves
In a banking system with limited reserves, selling bonds is a ___ monetary policy that will decrease the money supply, increase nominal interest rates, and move the economy farther away from full employment
contractionary
An increase in household savings will affect the loanable funds market in which of the following ways?
The supply of loanable funds will increase and the real interest rate will decrease.
Train when discount rate inc
dec ER, dec MS, inc i, dec C/Ig, dec AD
Train when bonds are bought
inc ER, inc MS, dec i, inc C/Ig, inc AD
Train when reserve requirement dec
inc ER, inc MS, dec i, inc C/Ig, inc AD
When Slf inc, real interest rate ___
decreases
What is the relationship between bond prices and interest rates
Inverse
What happens in bond market when r dec
inc Db, inc Pb
What is the federal funds rate
Interest rate when a bank loans from another bank
Demand for money has an ___ relationship with interest rate
inverse
