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88 Cards in this Set
- Front
- Back
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Paper currency |
Federal reserve notes |
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Demand deposits |
Money that sits in checking accounts |
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Checking accounts and metallic currency are the major form of money because of |
Safety of transactions Lower transaction cost Ease of recording transactions |
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Non monetary assets |
Stocks ane bonds |
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Time deposit |
Certificate of deposit (CD) |
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Checkable deposits like demand deposits and interest earning checking accounts are |
Transaction accounts |
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M1 |
The sum of currency, checkable deposits, and travellers checks |
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M2 includes ______ and M1 does not |
Time deposits/savings deposits |
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Most liquid assets are |
Closest to real money |
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Money lowers |
Transaction costs |
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Money is a _____ and _____ of |
Standard of value and store of value |
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Money is a means of _____ paymetnt because it makes it |
Deferred Easier to borrow and repay loans |
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3 types of financial institutions |
Commercial banks Savings and Loan associations Credit unions |
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The largest asset item for most banks |
Loans |
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A banks capital |
Difference between assets and liabilities |
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Money multiplier |
1÷reserve requirement |
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As reserve requirement goes up |
Money multiplier is reduced |
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Formula foe expanding money supply |
Change in money supply = (change in reserve) × (1÷reserve reqmt) |
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Equation of exchange |
M×V = P×Y |
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M |
Money supply |
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V |
Velocity of money |
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P |
Average price level |
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Y |
Real GDP |
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Velocity |
Average number of times that a dollar is used in purchasing final goods and services in a one year period |
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3 tools Fed uses to control supply of money |
Open market operations Change in reserve requirement Change in discount rate |
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To increase money supply Fed will ____ bonds |
Buy |
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To decrease money supply Fed will ____ bonds |
Sell |
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To increase money supply, Fed will ____ reserve requirement |
Lower |
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To decrease money supply, Fed will ____ reserve requirement |
Increase |
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Federal fund rate |
Interest rate the Fed charges banks for borrowing funds |
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If Fed wants to increase money supply they will ____ discount rate |
Lower |
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If Fed wants to decrease money supply they will _____ discount rate |
Increase |
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Most important method Fed uses to change stock of money |
Open market operations |
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On a graph the demand curve for money slopes _____ and the supply curve for money is _____ |
Downwards Vertical |
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Money market equillibrium occurs at |
The interest rate where qty of money demanded = qty of money supplied |
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Rising national income ____ demand for money and |
Increases Shifts demand curve to the right |
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Increase in money supply shifts money supply curve to the _____ and causes equilibrium interest rates to ___ |
Right Fall |
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If Fed engages in expansionary monetary policy, AD will____ and |
Increase AD curve will shift to the right |
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If Fed engages in contractionary monetary policy, AD will ____ and |
Decrease Curve will shift to the left |
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When interest rate falls, the qty of money demanded |
Increases |
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When Fed increases money supply the money supply curve |
Shifts to the right |
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US money supply controlled by |
Federal Reserve |
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When Fed initiates ______ monetary policy it can not force banks to make the loans that create new money |
Expansionary |
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Monetary policy controlled by |
Fed |
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Fiscal policy |
Change in taxes and govt expenditures |
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Fiscal policy controlled by |
Congress and president |
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Monetary policy is not slowed down like |
Fiscal policy (budgetary processes) |
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Aggregate demand |
Shows quantities of real domestic product that people wish to purchase at different price levels |
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Aggregate demand shows the relationship between |
Total output demanded and price level |
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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 |
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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 |
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Foreign economy effect |
As price level increases domestic goods become more expensive and consumers import more and buy less domestic goods |
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A decrease in price level ____ demand for money, _____ interest rate, ____ investment, and ___ real GDP demanded |
Decreases Decreases Increases Increases |
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An increase in the price level will ____ imports and ___ real GDP demanded |
Increase Decrease |
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An increase in price level will ___ real value of money, ___ purchasing power, and ___ real GDP demanded |
Decrease Decrease Decrease |
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An increase in price level will ___ demand for money, ___ interest rate, and ___ real GDP demanded |
Increase Increase Decrease |
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A decrease in price level will ___ imports and ___ in real GDP demanded |
Decrease Increase |
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A decrease in the price level will ____ real value of money assets, ___ purchasing power, and ___ real GDP demanded |
Increase Increase Increase |
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Aggregate supply |
Represents how much real GDP suppliers are willing to produce at different price levels |
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In the short run AS is |
Upward sloping |
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In the long run AS is |
Vertical at the natural rate of output |
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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 |
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Long run |
Time period long enough for prices of both output and input to adjust to changes in economy |
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AD curve will shift to the right when |
Increase in wealth, tax cut, increase in consumer confidence, govt spending increases, net exports increase |
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AD curve shifts to the left when |
Consumption decreases Govt spending decreases Net exports decrease |
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Fiscal policy is the use of |
Government purchases, transfers, and taxes to alter the equillibrium level of real GDP and price level |
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Govt spending > govt rev |
Budget deficit |
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Govt spending < govt rev |
Budget surplus |
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Balanced budget |
Govt rev = govt spending |
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Expansionary fiscal policy |
Lowers taxes and increases transfer payments and govt spending |
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Contractionary fiscal policy |
Increases taxes and lowers govt spending and transfer payments |
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According to the qty theory of money, a 3% increase in money supply |
Causes price level to raise by 3% |
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In a fractional reserve banking system a decrease in the reserve requirement |
Increases money multiplier and money supply |
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What 2 things both increase the money supply |
Lower discount rate and lower reserve requirement |
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shifts in aggregate demand contribute to |
fluctuations in output |
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Suppose that velocity rises while money supply stays the same |
P×y must rise |
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Which would raise the money supply and money multiplier? |
Fed buys bonds and lowers reservw requirement |
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Rank currency, fine arts, and stocks from most to least liquid |
Currency, stocks, fine art |
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The Fed lowers interest rates. As a result, in the short run real GDP ___ and price level ___ |
Decreases Rises |
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AD curve shows that a decrease in the price level |
Increases the real value of goods and services demandes in the economy |
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If the economy is likely to head into a recession and businesses reduce capital purchases, this would initially shift |
Aggregate demand to the left |
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As price level rises, the value of money |
Decreases and people want to hold more of it |
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Open market purchases by the Fed make the money supply |
Increase and the value of money decreases |
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In the short run, increase in govt expenditures |
Raises real GDP and price level |
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Govt increases taxes. As a result, in the short run real GDP ___ and price level___ |
Decreases Falls |
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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 |
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One way the govt can increase AD is |
Reducing income taxes |
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Money supply = $100 billion Nominal GDP = $800 billion Real GDP = $400 billion What is price level and velocity? |
Price level = 2 Velocity = 8 |
