econ 20b terms

Monetary Policy

The setting of the money supply and interest rates by policymakers.

Reserves

Deposits that the banks have received but have not loaned out.

Money Multiplier

1/Reserve Ratio (Fraction of deposits that banks hold as reserves)

Amount of money the banking system generates per dollar of reserves.

Leverage

The use of borrowed money (debt) to increase ROI/for investment

Open-Market Operations

The purchase & sale of US government bonds by the Fed.

Discount Rate

Interest rate on loans that the Fed makes to banks.

Fed Funds Rate

Market-determined interest rate that banks charge on loans that they make to each other.

Reserve Requirements

Regulations on the minimum amount of reserves that banks must hold against their deposits.

Nominal Variables

Variables measured in monetary units (ex. income)

—> Change in supply of money ONLY affects nominal variables

Real Variables

Variables measured in physical units (ex. qty of physical units)

Velocity of Money

Rate at which money changes hands

(Real GDP x GDP Deflator)/Qty. of Money

Inflation Tax

Revenue the government raises by creating money

Fisher Effect

When inflation rises, so does nominal interest rate.

Nominal Interest Rate = Real Interest Rate + Inflation Rate

Shoeleather Cost

The resources wasted when inflation encourages people to reduce their holdings

(People withdraw less cash/in increments because they want to keep as much money in the bank as possible to earn interest during times of inflation)

Menu Costs

The costs of adjusting/changing prices

Money Supply

MxV=PxY

Quantity of $ x Velocity of Money = GDP Deflator x Real GDP