ECO 202 EXAM 2

income

earnings over a period of time

wealth

assets - liabilities

money

assets that people are generally willing to accept in exchange for goods and services or for payments of debts

central bank

controls money

rank money, income, and wealth

money < income < wealth

Why do we accept dollar bills as a medium of exchange?

confidence that the dollar will be accepted by others

M1

currency in circulation + checking account deposits

M2

M1 + saving type accounts (savings accounts, small time deposits, money market mutual funds)

reserves

deposits bank keeps as cash in vault or deposits with federal reserve

largest assets of commercial and consumer banks

loans

securities/treasury bills

IOUs

largest liabilities of banks

deposits (checking and savings)

how do banks make profits?

interest rate spread

simple deposit multiplier

ratio of amount of deposits created by banks to the amount of new reserves. = change in checking deposits/change in bank reserves or 1/required reserve ratio

real world deposit multiplier

considerably smaller than simple deposit multiplier bc banks don't lend out as we predict and consumers keep currency out of the bank

central bank monetary authority

institution designed to oversee the banking system and regulate the quantity of money in the economy

3 parts of federal reserve

board of governors, reserve bank, federal open market committee (FOMC)

board of governors

7 members appointed by president to 14 year nonrenewable terms, chair appointed to 4 year renewable term

federal reserve district banks

12 banks

federal open market committee (FOMC)

fed committee responsible for open market operations and managing the money supply. meets every 6 weeks. 12 voting members: 7 board of governors, president of NY fed and 4 presidents from 11 other fed banks

federal reserve past and present chairs

past is Janet Yellen previous is Jerome powell

what causes bank run

maturity mismatch between deposits and loans

monetary policy

federal reserve: open market operations, discount policy, reserve requirements

open market operations

buying/selling of us treasury securities by fed reserve in order to control money supply. bill <1 year maturity, notes 2-10 year maturity. purchase of securities increase banks reserves and money supply goes up bc sellers of the securities deposit the fed payment into their checking account deposits

fed buy treasury securities

increase reserves, increase money supply

fed sells treasury securities

decrease reserves, decrease money supply

discount policy

discount rate is the interest rate the fed charges on loans (discount loans) to banks.. don't choose on exam. when bank receives loan from fed, bank reserves increase by amount of loan. its lender of last resort functions when banks are having liquidity problems

reserve requirements

increase in required reserve ratio decreases simple deposit multiplier and decreases money supply

by increasing interest rates on bank reserves...

can increase level of excess reserves banks are willing to hold, decreasing bank lending and decreasing money supply

quantity equation

M x V = P x Y

quantity theory of money

assume the velocity of money is constant, inflation equals change of money supply minus real GDP. predicts inflation in long run, bc velocity of money can move erratically in the short run.

AS-AD model

explains business cycle, inflation, and economic growth to some degree. demands and supply

recession and cyclical unemployment
inflation

decrease in AD or AS
increase in AD or decrease in AS

variables that shift AD

interest rates
gov purchases
taxes
expected future income
expected future profitability
foreign real GDP
exchange rate
household wealth

LRAS

labor, capital, stock and technology. POTENTIAL GDP

SRAS

labor, capital, technology and
expected future price level (increase in this decreases SRAS bc increases cost of production)
price of important resources
POTENTIAL GDP + PRICE OF INPUTS