Chapter 3 Study Guide

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aggregate measures

used to estimate money supply's size

commodity money

based on some item of value

discount rate

the interest rate that the Federal Reserve sets and charges for loans to member banks

excess reserves

the reserves that a bank holds beyond the federal reserve requirement

federal funds rate

the amount of interest charged for short-term inter bank loans

liquidity

the measure of how quickly things may be converted into something of value such as cash

fractional reserve system

a system where a fraction of total money that was deposited must be kept in reserve

money supply

the liquid assets held by banks and individuals

multiplier effect

it is money that is to create more money and is calculated by dividing total bank deposits by the reserve requirements

primary reserves

consist of cash on hand, deposits that may be due from other banks, and the percentage required by the Fed held in a vault of deposit in District Reserve bank

prime rate

the interest rate that banks charge their best and most reliable customers

M1

money that can be spent immediately

M2

all the money in M1 plus short-term investments

M3

all the money in M1 and M2 plus large deposits

fiat money

money that is deemed legal tender by the government and is not based on or convertible to a commodity

secondary reserves

include securities the bank purchases from the Federal Government usually in the form of government securities

determining factors of interest rates

market forces, competition between banks, and the Federal Reserve (sometimes)

role of interest rates on the economy

Low interest rates can stimulate economic development because the more cash you have available, the more likely you are to buy something

why do banks like low interest rates?

they get more profit because of more customers. they also beat the competition.

how are the federal fund rate changes passed on to customers?

the banks adjust their prime rate

3 types of money

commodity money, receipt money, and fiat money

commodity money

based on an item of value (gold)

receipt money

could be exchanged for a real commodity (bank notes)

3 types of bank reserves

primary, secondary, and excess

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