Unit 4: Interest Rates & Monetary

Components of M1- Cash, checkable deposits, and travelers checks. Currency and checkable deposits. (federal reserve notes also)

Know what is included in M2 but NOT M1- Considered “near money”. Can be easily transfered into useable money. It is saving accounts, money market mutual funds under $1000, and time deposits under $1000. CD’s saving bonds, bills and notes.

Functions of money- (Medium of exchange)Is anything that can be used to purchase a good or service. (Unit of Account) Places a value on gods, ex. a yard stick measures distance and currency measures value. (Store of Value)- Used as an asset set aside for the future.

Know what a fractional reserve banking system is-

Know the primary purpose of reserve requirement

25% of test will be about the relationship between checkable deposits, required reserve ratio, and excess reserve ratio. Big part of the test.

if the reserve requirement is 10% and a new customer puts in $1000 into their checking account, by how much do excess reserves have. What is left. $900.

Put into word and add a table with this info as an example.

Know the purpose of expansionary monetary policies.

Know the appropriate policy to reduce inflation.

Know which monetary policy will increase capital investment

When the federal reserve sells bonds on the open market how will the money supply, interest rates, output and employment change?

Know the appropriate monetary and fiscal policy for recessions and inflation.

Know what policy will cause an increase in employment and price level

Know what open markets consist of

Know what an excessive increase in the money supply will do to its purchasing power

Understand nominal interest rates

Know what the federal funds rate is

Know what assets and liabilities are on a banks balance sheet.

Know what the discount rate is

Know who the federal reserve sells bonds to on the open market

Know the impact that interest rate wising has on bond prices

Know the relationship between interest rates and the asset demand for money.

Who the federal reserve buys bonds from on the open market

Know what the increase and discount rate do