Ap Macroeconomics Unit 4 Study Guide

what is the relationship between interest rate and interest sensitive spending

inverse relationship

liquidity

the ease with which an asset can be converted to a medium of exchange

bonds

loans or IOUs that represent debt that the govt., business, or individual must repay to the lender

stocks

represent ownership of a corporation and the stockholder is often entitled to a portion of the profit paid out as dividends

what is the relationship between bond prices and interest rate

inversely related

formula for real interest rates

real ir = nominal ir- expected inflation

formula for nominal interest rates

nominal ir= real ir - expected inflation

commodity money

something that preforms the function of money and has intrinsic value

fiat money

something that serves as money but has no other value/uses

what are the 3 functions of money

• medium of exchange

• measure of value

• store of value

M0 money (monetary base)

• currency in circulation

• bank reserves

M1 money

• currency in circulation

• demand deposits in the bank (checking account and savings account)

M2 money

• M1 money

• certificates of deposit

• money market funds

fractional reserve banking

when the bank holds a portion of deposits to cover potential withdraws and then loans the rest out

formula for money multiplier

1/reserve requirement

when the FED gives money to commercial banks do they have to keep required reserves

no, they do not have to keep any reserves they can loan it all out

relationship between interest rate and quantity of money demanded

inverse relationship

money market graph

money demand shifters

• changes in price level

• change in income

• change in technology

what monetary policy does the FED use to adjust money supply in limited reserves

• reserve requirement ratio

  • amount commercial banks need to keep in reserves

• discount rate

  • interest rate the FED charges commercial bank

  • inverse relationship between MS and DR

• open market operations

  • buying and selling bonds

  • buy big, sell small

federal funds rate

the interest rate that banks charge one another for one day loans of reserve

monetary policy the FED uses to adjust monetary supply in ample reserves

• Administered rates like interest on reserves

  • the interest rate that the FED pays commercial banks to hold reserves

  • IOR and MS have an inverse relationship

    • increase IOR to slow economy

    • decrease IOR to boost economy

reserve market model

• top line

  • represents the discount rate

• bottom line

  • represents IOR

• middle section

  • represents federal funds rate

loanable funds market

• supply (lenders)

  • shifts by change in inflow/outflow

• demand (borrows)

  • shifts by change in borrowing