PPT 12 Money and Monetary Policy – Introduction to Macroeconomics

Flashcards covering key concepts from the lecture on Money and Monetary Policy.

Fiat Money

Legal tender that serves four fundamental functions: medium of exchange, unit of account, store of value, and standard of deferred payment.

Monetary Aggregates

Classifications of money supply, starting from the narrowest 'monetary base' to 'broad money'.

Expansionary Monetary Policy

policy aimed at increasing the money supply to combat recession and stimulate economic growth.

• Effective in Closing the output gap

• Effective when sticky price, unemployment and liquidity trap

Restrictive Monetary Policy

A policy aimed at decreasing the money supply to control inflation and stabilize an overheating economy.

• Shift AD and bring it back to Full-employment

Excess reserves

Funds bank can lend out after keeping the required reserves

Fractional reserve banking

The process through which a bank is required to keep a fraction of a deposit in their liquidity, thus regulating the banking system

M1

• currency in circulation

• Overnight deposits

• Money that can be spend immediately = narrow money

• Very liquid money

• cash & circulation (M1+)

• Chequable deposits (M1+)

• Personal deposits (M1+)

• Non chequable deposits (M1++)

M2

• Less liquid money that are almost money, but take time to convert into cash = broad money

• Fix term deposit ( < 2 years )

• Deposits with notice ( < 3 months)

• Mutual fonds (M2+)

• Saving Bonds (M2+)

M3

• Less liquid money that are almost money, but take time to convert into cash = broad money

• Money market funds

• Repurchase agreements

• Debt instruments ( < 2 years )

Why tracking monetary aggregate of money supply?

• Decides monetary policy

• Monitor economic activity

• Understand inflation pressures

Medium of exchange

Facilitate exchange between sellers and buyers as intermediaries to avoid exchange limitations

Example: dollar, coins, checks

Unit of account

unit of measurement, used for pricing and keeping

records of assets such as debt, property or financial instruments.

Store of value

to transfer purchasing power from the present to the

future (savings)

Standard of deferred payments

must be acceptable to make purchases

today that the purchaser will pay in the future (credit).

Money multiplier

Shows how much the money supply can increase based on the reserve requirement

Credit multiplier

How banks create money out of thin air:

1. initial deposit

2. Loan circulation

3. The process continue creating new money with each steps

Lower reserve requirements (money multiplier)

Means a higher multiplier, so banks can create more money through lending

Bank run on deposit (banking crises)

Depositors withdrawn their money from bank at the same time because of fear that bank will fail

• Banks do not convert cash fast enough

• Drain bank reserve = closes or bankrupt banks

• Great Depression

Loan Delinquencies

Borrowers fail to make payments on their loans as scheduled

• reduced banks abilities to loan

• Financial instability

• Great Recession

Asset Depreciation

Significant drop in the value of assets held by banks (investments, real estates…)

• Loss of capital

• Undermine confidence of borrowers on the banking system

• Silicon Valley’s Bank