Monetary Policy, Money, + the Fed

(function of money) Unit of account

Provides a means for comparing values of goods and services.

(function of money) Medium of exchange

Anything that is used to determine value during the exchange of goods and services.

(function of money) Store of value

Money keeps its value when saved, except during inflation.

Currency

Coins and paper bills used as money.

(key features of money) Durability

Money must withstand physical wear and tear.

(key features of money) Acceptability/uniformity

All units of money must be uniform and accurately counted.

(key features of money) Fungibility/divisibility

Money can be divided into many units of value.

(key features of money) Portability

Money can be transported and easily transferred.

(key features of money) Scarcity/limited amount

If not limited, money is not useful.

(sources of money’s value) Commodity money

Objects that have inherent value and can be used as money.

(sources of money’s value) Representative money

Objects that have value solely because they can be exchanged for something of value.

(sources of money’s value) Flat money

Legal tender; has value because a government has declared it acceptable means to pay debts.

1st National Bank

The Supreme Court case McCulloch v. Maryland affirmed centralized banking.

Bank runs

Widespread panics where people try to redeem paper money simultaneously.

Wildcat banks

Banks located on the frontier, known for fraud and instability.

Federal Reserve System

A system of 12 regional banks that manage the nation's monetary policy.

Glass-Steagall Act

Legislation that separated commercial banking from investment banking.

Required reserve ratio (RRR)

The fraction of deposits banks are required to keep in reserve.

Fractional banking

System where banks hold a portion of deposits as reserves.

Monetary policy

The process by which the Federal Reserve manages the money supply.

Open market operations

Buying and selling securities to implement monetary policy.

Expansionary monetary policy

Increasing money supply to decrease interest rates and encourage borrowing.

Contractionary monetary policy

Decreasing money supply to increase interest rates and discourage borrowing.

Discount rate

The interest rate charged by the Federal Reserve to banks.

Federal funds rate

The interest rate at which banks borrow from each other.

Prime rate

The interest rate banks charge to their best customers.

FOMC (Federal Open Market Committee)

Group that meets to set monetary policy and adjust the money supply.

Easy money policy

Increases money supply to lower interest rates and encourage spending.

Tight money policy

Reduces money supply and pushes interest rates up to restrict spending.

Fiscal policy

Economic policy that combats unemployment and is measured by Congress and the President.

Inflation

The increase in prices and decrease in the purchasing power of money.

Financial intermediaries

Institutions that extend credit from depositors to borrowers.

Money multiplier

Formula that determines the total amount of new money that can be created.

Excess reserves

Bank reserves greater than the amount required by the Federal Reserve.

Inside lag

the time it takes to implement monetary policy (occurs 1. time it takes to ID a problem— economy is unpredictable which makes it hard to determine, 2.it takes time to enact policy)

• more severe for fiscal policy>monetary policy (monetary policy is more streamlined)

Outside lags

the time it takes for a new policy to be determined

fiscal policy: lasts as long as is required for new govt spending or tax policies to take effect + begin to affect real GDP and inflation rate

monetary policy: lasts a lot longer, affect business investment plans (change in interest rates may not have the full effect on investment spending for several years— more than 2 yrs can pass before the impact is felt)