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33 Cards in this Set
- Front
- Back
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What 3 functions does money perform? |
1. Store of Value 2. Unit of Account 3. Medium of Exchange |
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M0= |
Physical dollars and coins in circulation |
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M1= |
M0 + Demand Deposits (Checking Accounts) |
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M2= |
M1 + Time Deposits (M1 + Savings Account) |
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Fractional Reserve Banking: |
Banks only keep a fraction of their reserves on hand |
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Bank Reserves: |
The amount of a bank's reserves that is kept on hand |
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Money Multiplier = |
1 / (reserve ratio) |
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Federal Reserve: |
Central bank of the United States. It regulates banks, sets monetary policy, and maintains the stability of the financial system |
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Is the Federal Reserver controlled by the US Government? |
No. |
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Who governs the Federal Reserve? |
Board of Governors with 7 members |
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How many federal reserve banks are there? |
12 regions |
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What does FOMC stand for? |
Federal Open Market Comittee |
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FOMC is made up of who? |
7 members of the board of governors and 5 of the 12 regional bank presidents |
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The federal reserve sets what? |
Interest rates, reserve requirements, and conducts open market operations |
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Open market operations: |
Buying and selling of bonds by the Feds |
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When does the Federal reserve create new money? |
When it purchases bonds |
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When does the federal reserve destroy money? |
When it sells bonds |
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What determines the price of a bond? |
Supply and demand |
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Interest rates and bond prices move in opposite directions. True or false? |
True |
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A bond's yield (interest rate) is calculated by: |
(Face value / Market Value) -1 * 100 |
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Nominal Interest Rates = |
Real interest rates + Expected inflation |
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If inflation is higher than expected |
Borrowers win and lenders lose |
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If inflation is lower than expected |
Borrows lose and lenders win |
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The goals of the FOMC are |
control inflation and to conduct monetary policy to reduce the severity of the business cycle |
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Expansionary Monetary Policy |
1. Lower reserve requirement 2. Lower the interest rates 3. Buying treasury bonds |
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Contractionary Monetary Policy |
1. Raising the reserve requirement 2. Raising interest rates 3. Selling bonds |
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Recognition Lag |
Takes time to realize we're in a recession |
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Implementation Lag |
The FOMC only meets 8 times a year so it takes time to meet up and determine a policy |
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Impact Lag |
Once the policy is in action, it may take months for it to take effect |
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Political Pressure: |
The Fed is independent, but still faces political pressure |
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Liquidity Traps: |
Just because new money appears in the economy doesn't mean people will spend it |
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MV=PQ |
Money Supply * Velocity of Money = Price level * Quantity of RGDP |
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The velocity of money = |
PQ / M |
