Money
This characteristic of money means it keeps its value over time.
What is a store of value?
This is the portion of deposits that banks must keep and cannot loan out.
What is the required reserve ratio?
The price of money in the money market is known as this.
What is the nominal interest rate?
In the loanable funds market, households supply this.
What is savings?
This is the central bank of the United States.
What is the Federal Reserve?
This type of money has no intrinsic value but is accepted because the government says so.
What is fiat money?
If the reserve requirement is 10%, this is the simple money multiplier.
What is 10?
(1 / 0.10 = 10)
If the Federal Reserve increases the money supply, this happens to interest rates.
What is they decrease?
An increase in government borrowing causes this shift in the loanable funds market.
What is an increase in demand for loanable funds?
This Fed tool involves buying or selling government bonds.
What are open market operations?
This measurement of the money supply includes currency, checking deposits, and traveler’s checks.
What is M1?
When a bank receives a deposit what catagory on a T-Chart does it go into?
What is Liabilities?
This curve in the money market is vertical because it is set by the Fed.
What is the money supply curve?
When government borrowing drives up real interest rates and reduces private investment, this occurs.
What is crowding out?
Lowering this Fed-controlled rate makes it cheaper for banks to borrow from the Fed.
What is the discount rate?
This term refers to how quickly and easily an asset can be converted into cash.
What is liquidity?
When the Fed buys bonds, this happens to bank reserves and the money supply.
What are both increase?
A higher price level increases this, shifting the money demand curve right.
What is the demand for money (transactions demand)?
If interest rates fall, this typically happens to the quantity of loanable funds demanded for investment.
What is it increases?
If the Fed wants to reduce inflation, it will likely do this to the reserve requirement.
What is increase it?
This concept explains why banks can loan out more money than they hold, increasing the money supply.
What is fractional reserve banking?
A customer deposits $2,000 in a bank with a 20% reserve requirement. What is the maximum money that can be created?
What is $8,000?
(1/0.20 = 5; 5 × 2,000 = 10,000 total — 2,000 original = 8,000 new money)
This type of monetary policy is used to fight inflation and results in higher interest rates.
What is contractionary monetary policy?
A recession reduces household income. Explain the shift in the loanable funds market.
What is the supply of loanable funds decreases?
(less saving → supply curve left → higher real interest rate)
Name the full chain reaction when the Fed buys bonds, starting with bank reserves and ending with real GDP.
What is: bank reserves ↑ → money supply ↑ → interest rates ↓ → investment ↑ → AD ↑ → real GDP ↑?