Macroeconomics Chapter 8: Money, The Price Level, and Inflation

Flashcards based on Chapter 8 for Macroeconomics 14th Edition, covering money definitions, banking functions, the Federal Reserve, and the Quantity Theory of Money.

Money

Any commodity or token that is generally acceptable as a means of payment.

Means of payment

A method of settling a debt.

Medium of exchange

An object that is generally accepted in exchange for goods and services.

Barter

The direct exchange of goods and services without the use of money, requiring a double coincidence of wants.

Unit of account

An agreed measure for stating the prices of goods and services.

Store of value

A function of money that allows it to be held for a time and later exchanged for goods and services.

Currency

The notes and coins held by individuals and businesses.

M1

An official measure of money consisting of currency plus demand deposits and other liquid deposits owned by individuals and businesses that can be withdrawn on demand.

M2

An official measure of money consisting of $M1$ plus small-denomination time deposits and retail money market mutual funds.

Depository institution

A firm that takes deposits from households and firms and makes loans to other households and firms.

Commercial bank

A private firm licensed by the Comptroller of the Currency or by a state agency to receive deposits and make loans.

Thrift institutions

Institutions such as savings and loan associations, savings banks, and credit unions.

Money market mutual fund

A fund operated by a financial institution that sells shares in the fund and holds assets such as U.S. Treasury bills.

Federal Reserve System (the Fed)

The central bank of the United States.

Central bank

The public authority that regulates a nation’s depository institutions and controls the quantity of money.

Federal funds rate

The interest rate that banks charge each other on overnight loans of reserves.

Board of Governors

A component of the Fed with seven members appointed by the president for staggered 14-year terms.

Federal Open Market Committee (F O M C)

The main policy-making group in the Federal Reserve System consisting of the 7 Board of Governors members and 5 regional bank presidents.

Monetary base

The Fed’s total liabilities, calculated as the sum of currency and depository institutions’ deposits at the Fed.

Open market operation

The purchase or sale of government securities by the Fed from or to a commercial bank or the public.

Discount window

A facility through which the Fed makes last resort loans to commercial banks and other depository institutions.

Discount rate

The interest rate paid by discount window borrowers, set by the Fed’s Board of Governors.

Interest on reserves rate

The interest rate that banks earn on their reserves held on deposit at the Fed.

Desired reserve ratio

The ratio of a bank’s reserves to total deposits that a bank plans to hold.

Unplanned reserves

Actual reserves minus desired reserves.

Currency drain

The leakage of reserves into currency as deposits increase.

Currency drain ratio

The ratio of currency to deposits held by people.

Money multiplier

The ratio of the change in the quantity of money to the change in the monetary base, calculated as $\frac{1 + C/D}{R/D + C/D}$.

Money market

A virtual market where households and businesses demand money, the Fed and banks supply money, and an equilibrium quantity and interest rate are determined.

Demand for money

The relationship between the quantity of money demanded and the nominal interest rate when all other influences remain the same.

Supply of money

The relationship between the quantity of money supplied and the nominal interest rate when all other influences on the Fed and banks remain the same.

Quantity theory of money

The proposition that, in the long run, an increase in the quantity of money brings an equal percentage increase in the price level.

Velocity of circulation

The average number of times in a year a dollar is used to purchase goods and services in $GDP$, noted as $V$.

Equation of exchange

An identity stating that $M \times V = P \times Y$, where $M$ is the quantity of money, $V$ is velocity, $P$ is the price level, and $Y$ is real $GDP$.