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88 Cards in this Set

  • Front
  • Back

Paper currency

Federal reserve notes

Demand deposits

Money that sits in checking accounts

Checking accounts and metallic currency are the major form of money because of

Safety of transactions

Lower transaction cost

Ease of recording transactions

Non monetary assets

Stocks ane bonds

Time deposit

Certificate of deposit (CD)

Checkable deposits like demand deposits and interest earning checking accounts are

Transaction accounts


The sum of currency, checkable deposits, and travellers checks

M2 includes ______ and M1 does not

Time deposits/savings deposits

Most liquid assets are

Closest to real money

Money lowers

Transaction costs

Money is a _____ and _____ of

Standard of value and store of value

Money is a means of _____ paymetnt because it makes it


Easier to borrow and repay loans

3 types of financial institutions

Commercial banks

Savings and Loan associations

Credit unions

The largest asset item for most banks


A banks capital

Difference between assets and liabilities

Money multiplier

1÷reserve requirement

As reserve requirement goes up

Money multiplier is reduced

Formula foe expanding money supply

Change in money supply = (change in reserve) × (1÷reserve reqmt)

Equation of exchange

M×V = P×Y


Money supply


Velocity of money


Average price level


Real GDP


Average number of times that a dollar is used in purchasing final goods and services in a one year period

3 tools Fed uses to control supply of money

Open market operations

Change in reserve requirement

Change in discount rate

To increase money supply Fed will ____ bonds


To decrease money supply Fed will ____ bonds


To increase money supply, Fed will ____ reserve requirement


To decrease money supply, Fed will ____ reserve requirement


Federal fund rate

Interest rate the Fed charges banks for borrowing funds

If Fed wants to increase money supply they will ____ discount rate


If Fed wants to decrease money supply they will _____ discount rate


Most important method Fed uses to change stock of money

Open market operations

On a graph the demand curve for money slopes _____ and the supply curve for money is _____



Money market equillibrium occurs at

The interest rate where qty of money demanded = qty of money supplied

Rising national income ____ demand for money and


Shifts demand curve to the right

Increase in money supply shifts money supply curve to the _____ and causes equilibrium interest rates to ___



If Fed engages in expansionary monetary policy, AD will____ and


AD curve will shift to the right

If Fed engages in contractionary monetary policy, AD will ____ and


Curve will shift to the left

When interest rate falls, the qty of money demanded


When Fed increases money supply the money supply curve

Shifts to the right

US money supply controlled by

Federal Reserve

When Fed initiates ______ monetary policy it can not force banks to make the loans that create new money


Monetary policy controlled by


Fiscal policy

Change in taxes and govt expenditures

Fiscal policy controlled by

Congress and president

Monetary policy is not slowed down like

Fiscal policy (budgetary processes)

Aggregate demand

Shows quantities of real domestic product that people wish to purchase at different price levels

Aggregate demand shows the relationship between

Total output demanded and price level

The real balance/purchasing power effect

Change in price level reduces real value of money which decreases real purchasing power which lowers consumption and real GDP demanded

Interest rate effect

As price level increases demand for money increases which causes moneys price (interest rate) to increase. This causes lower investment and decrease in demand for qty of goods demanded

Foreign economy effect

As price level increases domestic goods become more expensive and consumers import more and buy less domestic goods

A decrease in price level ____ demand for money, _____ interest rate, ____ investment, and ___ real GDP demanded





An increase in the price level will ____ imports and ___ real GDP demanded



An increase in price level will ___ real value of money, ___ purchasing power, and ___ real GDP demanded




An increase in price level will ___ demand for money, ___ interest rate, and ___ real GDP demanded




A decrease in price level will ___ imports and ___ in real GDP demanded



A decrease in the price level will ____ real value of money assets, ___ purchasing power, and ___ real GDP demanded




Aggregate supply

Represents how much real GDP suppliers are willing to produce at different price levels

In the short run AS is

Upward sloping

In the long run AS is

Vertical at the natural rate of output

Short run

A time period in which output prices can change in response to supply and demand, but input prices have not yet been able to adjust

Long run

Time period long enough for prices of both output and input to adjust to changes in economy

AD curve will shift to the right when

Increase in wealth, tax cut, increase in consumer confidence, govt spending increases, net exports increase

AD curve shifts to the left when

Consumption decreases

Govt spending decreases

Net exports decrease

Fiscal policy is the use of

Government purchases, transfers, and taxes to alter the equillibrium level of real GDP and price level

Govt spending > govt rev

Budget deficit

Govt spending < govt rev

Budget surplus

Balanced budget

Govt rev = govt spending

Expansionary fiscal policy

Lowers taxes and increases transfer payments and govt spending

Contractionary fiscal policy

Increases taxes and lowers govt spending and transfer payments

According to the qty theory of money, a 3% increase in money supply

Causes price level to raise by 3%

In a fractional reserve banking system a decrease in the reserve requirement

Increases money multiplier and money supply

What 2 things both increase the money supply

Lower discount rate and lower reserve requirement

shifts in aggregate demand contribute to

fluctuations in output

Suppose that velocity rises while money supply stays the same

P×y must rise

Which would raise the money supply and money multiplier?

Fed buys bonds and lowers reservw requirement

Rank currency, fine arts, and stocks from most to least liquid

Currency, stocks, fine art

The Fed lowers interest rates. As a result, in the short run real GDP ___ and price level ___



AD curve shows that a decrease in the price level

Increases the real value of goods and services demandes in the economy

If the economy is likely to head into a recession and businesses reduce capital purchases, this would initially shift

Aggregate demand to the left

As price level rises, the value of money

Decreases and people want to hold more of it

Open market purchases by the Fed make the money supply

Increase and the value of money decreases

In the short run, increase in govt expenditures

Raises real GDP and price level

Govt increases taxes. As a result, in the short run real GDP ___ and price level___



Which of the following combo of real interest rate and inflation implies a nominal interest rate of 7?

Real of 6 and inflation of 1

One way the govt can increase AD is

Reducing income taxes

Money supply = $100 billion

Nominal GDP = $800 billion

Real GDP = $400 billion

What is price level and velocity?

Price level = 2

Velocity = 8