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Macroeconomics quiz 3

Terms in this set (131)

is the amount of money available in the economy.
The money supply is managed by the Fed.
The Fed classifies different types of money by their liquidity.
The monetary base includes cash and bank reserves, sometime referred to as hard money.
M1 includes cash plus checking account balances.
M2 includes M1 plus savings accounts and other financial instruments.
M1 includes cash (hard money) plus checking accounts and demand deposits (which aren't exactly cash but are still readily available). M2 is broader, including everything in M1 and also financial instruments where money is locked away for a specified period of time. These financial instruments (for example, CDs) are slightly less liquid than other forms of money
In nominal terms, all three measures of money have increased over time. However, M2 sped up dramatically starting in 1995. The monetary base (hard money) increased dramatically in 2008 as part of the effort to combat the financial crisis. We can also see that the multiplier was relatively stable over time until the huge change sparked by the 2008 financial crisis. In fact, the money multiplier was less than 1 after 2009, as banks held onto much of their deposits and were unwilling to lend.

Some students may question how m = 1/r can be less than one, since that implies r > 1, which is impossible. While outside of the scope of the text, it should be noted that the deposit multiplier presented is a simplification of m = (1+c)/(c+e+r), where c is the currency-to-deposit ratio, e is the excess-reserves-to-deposit ratio, and r is the required-reserve ratio. The text has simplified the analysis by assuming that c = e = 0. Thus, no one holds currency (just deposits), and banks only hold required reserves. In reality, c and e are positive; during crises, e typically increases. As the denominator increases, the fraction decreases and can be less than 1.