SSE 200 Foundations of Economics (Bob Jones University) Test 5

How do banks create money?

By lending their excess reserves

What is a gold standard?

Every dollar issued must be backed by gold

Inflation

Prices increase but the worth of money decreases. It is caused by the printing of more money than is justified by the countries wealth

Real Interest Rate

A real interest rate is an interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds

Real Interest=Nominal Interest-Inflation

Nominal Interest Rate

Nominal interest rate refers to the interest rate before taking inflation into account.

(What the interest rate says on the original loan agreement)

The Federal Reserve

The Central Bank of the United States and the most powerful financial institution in the world

Monetary Policy

A policy that introduces more money into the economy annually through the buying and selling of government bonds and modifications to the interest rates of loans. (All policies are established by the Federal Reserve)

Fiscal Policy (Budgetary)

The manipulation of the federal government's budget and the tax rates in order to bring about desired levels of total spending in the overall economy

Budget Deficit

Where total expenditures exceed total revenue (Term is used for government spending not local businesses) In order to make up the deficit a government must take out loans to avoid bankruptcy

Budget Surplus

Where total revenue exceeds total expenditures. It is often generated by taxes (the U.S. has not had one since the 90's due to the demand for more government services)

Credit Market

Credit market refers to the market through which companies and governments issue debt to investors, such as investment-grade bonds, junk bonds and short-term commercial paper. (these are all types of loans)

Money

Anything that serves as a general or common medium of exchange

Currency

Money that is in the hands of the non bank public

Deposits

Money that is in the hands of a bank

M1

Measures the sum of currency and deposits together. It is one of the smaller and more narrow ways to measure money supply

M2

This includes everything in M1 but it also includes other assets that can be turned into money quickly not just cash and checkable deposits like M1

Open Market Operations

Refers to the buying and selling of bonds by the Federal Reserve to either expand or contract the amount of money in the banking system (part of a monetary policy-see above)