Money
Federal Reserve
Money Growth and Inflation
Monetary policy
Fiscal policy
100
Use money to tell us how much something is worth
Unit of account
100
This is the interest rate at which the fed loans money to the banks. Influences other interest rates in the economy
discount rate
100
What is inflation
Money supply shifts to the right I.e. more money in the economy
higher average prices
100
Whats the deal with money supply?
Money supply is constant
Set by the fed
Unrelated to interest rate
100
goal of fiscal policy
Close rgaps and egaps by using changes in government spending(G) and taxes(T)
200
Money without independent or backed value that is guaranteed by the government or some other body
fiat
200
three tools
Open market policy
Discount rate
Reserve ratio
200
Increases in the money supply only affects prices, not output, in the LR
Money neutrality
200
What is the goal of monetary policy
changes in money supply to alter AD to fix rgap or egap
200
What is our direct and indirect tool in fiscal policy
Direct - Government spending
Indirect - Taxes
300
What is included in M2
M1 plus savings, small time deposits, money market mutual funds
300
what are open market operations
Bonus: how does the fed BUYING bonds impact money supply
buying and selling of US bonds (US debt)
Money supply increases
300
What is velocity of money?
How many times a year a bill changes hands
300
What are the reasons we demand money
Transactions demand – buy things
Precautionary demand – for emergencies
Speculative demand – take risks (casino)
300
Debt vs. deficit
Deficit is how much you borrow in the current time period
debt is the amount of money the borrowed over time to date to finance deficits
400
Total amount of new money banks can create by loaning out excess reserves from an initial deposit
Potential deposit creation
Bonus for the equation (NO NOTES)
400
precent of deposits banks must keep in the bank
reserve ratio
400
MV=PY
What does each variable mean
Bonus: why do they equal each other
Quantity theory
M=quantity of money
V= velocity of money
P=price level
Y= GDP output goods/ services
Relates quantity of money (MV) to nominal GDP (PY)
400
What are the tools to alter the money supply
Open market operations
Discount rate
Reserve requirements
400
What are the two fiscal policy equations
G
Change AD = Change G * (1/ 1-mpc)
T
Change AD = Change C * (1/1-MPC)
Change C = Change T *MPC
500
What is
rr RR ER MM
Reserve ratio (rr)
The percentage of a deposit the bank has to keep in the bank
Required reserved (RR)
Amount of a deposit the bank has to keep in the bank
RR=rr*deposit
Excess reserves (ER)
The part of a deposit the bank can loan out
ER= deposit-RR
- Money multiplier (MM)
Captures how much an initial deposit is multiplied into "new" money
1/rr I.e. reserve ratio
500
Fed structure?
and the feds job
Chair
7 members of the board of governers
Monitor banking system
Regulate money supply to manage economic fluctuations
500
Draw a money market graph
500
what is the zero lower bound
The fed increases the money supply which lowers interest rates but they cant fall below zero
If you cant lower the interest anymore, you cant increase I and C and shift AD to the right
500
To change AD $75 million what must happen?
use an mpc of .86
G must change by $10.5 million