Money Definitions
This term represents anything that can be used to purchase goods and services.
Money
The Monetary Base (M0) includes these two categories.
Currency in Circulation
Bank Reserves
Demand Deposits are listed as this on a bank's balance sheet.
Liability
This is the main tool the Federal Reserve utilizes to manipulate rates.
Open Market Operations
A financial asset that pools funds to invest.
Mutual Fund
List the following terms from least liquid to most liquid: Bond, Check, House, Cash
House
Bond
Check
Cash
This is the largest portion of the M1 money supply.
Demand Deposits (Checking and Savings Accounts)
The Money Multiplier is calculated using this formula.
1 / Required Reserve Ratio
TRIPLE PLAY!
These are the three main tools the central bank can employ.
1). Reserve Ratio
2). Discount Rate
3). Open-Market Operations
Savings, Stocks, Bonds: Highest potential return--highest risk.
Stocks
The equation used to adjust for inflation is represented by this formula.
Nominal IR = Inflation + Real IR
OR
Real IR = Nominal IR - Inflation
When going from M0 to M1, this category is not carried over.
Bank Reserves
DAILY DOUBLE!
This term represents the type of banking that takes place when banks can loan out a portion of customer demand deposits.
Fractional Reserve Banking
What the FED should do to the RRR in a recession.
Lower it.
The demand for Loanable Funds depends mainly on this.
Expectation of Return on Investment (ROI)
When interest rates increase, these bonds prices decrease.
Previously Issued
TRIPLE PLAY!
These are the three functions of money.
Unit of Account (currency label)
Store of Value (holds purchasing power)
Medium of Exchange (exchanged for goods and services)
Banks' total reserves are broken up into these two categories in a limited reserves framework.
Required Reserves
Excess Reserves
What the FED should do with bonds (OMO) to decrease the money supply and raise interest rates.
Sell
Lowest liquidity: CDs, Savings Deposits; Checkable Deposits
CDs
If interest rates increase, borrowers would lose if they took out a loan with this type of interest rate.
Variable (Bank would win here)
(Borrowers would win if the loan had a FIXED interest rate).
When someone deposits their "mattress money" of $10,000 into a savings account, the M1 money supply changes in this way.
Currency in circulation decreases by $10,000.
Demand Deposits increases by $10,000.
This is the reason why the maximum change to the money supply is larger when the government buys bonds from banks compared to individuals depositing money in demand deposit accounts (when using a limited reserves framework).
All of government bond purchases go to excess reserves (all of it can be loaned out).
A portion of demand deposits must be put into required reserves (based on the RRR).
DAILY DOUBLE!
The institution responsible for controlling money policy within The FED.
FOMC
If the reserve ratio is 10%--and the FED raises it to 20%--what happens to the money multiplier, supply of money, interest rates, investment spending and GDP?
Except interest rates--all will decrease.