Understanding Money Supply and Monetary Base

These flashcards cover key concepts related to money supply, monetary base, and the roles of the central bank and commercial banks.

What does M1 money supply include?

M1 includes the sum of currency in circulation and checking accounts.

What is the formula for money supply (M1)?

M1 = Currency in circulation (C) + Checkable deposits (D).

What additional components does M2 money supply include over M1?

M2 includes everything in M1, plus savings deposits, time deposits under $100,000, and shares in money market mutual funds.

What is the monetary base (M0)?

Monetary base (M0) is the sum of currency in circulation and bank reserves.

What are bank reserves?

Bank reserves are the funds that banks hold at the central bank.

How does the central bank influence bank reserves?

The central bank influences bank reserves through open market operations and discount lending.

What is a money market mutual fund?

A money market mutual fund issues shares to raise funds and invests in short-term, low-risk debt securities.

What happens to bank reserves when the Fed conducts an open market purchase?

Bank reserves increase as the central bank buys securities, which adds to the reserves of financial institutions.

What is the impact of a required reserve ratio increase on the money supply?

An increase in the required reserve ratio causes the money multiplier to decline, leading to a decrease in the money supply.

How can the public influence the money supply?

The public can influence the money supply by depositing or withdrawing cash in their checking accounts.

What is meant by multiple deposit expansion?

Multiple deposit expansion refers to the process by which banks create money through lending more than the actual reserves they hold.

What is the equation that links the money supply and monetary base through the money multiplier?

M1 = M0 * money multiplier (m).