AP MACRO Money, Banking, and The Fed
Review key banking terms and formulas for AP Macro
Terms in this set (50)
They are three functions of money
medium of exchange, measure of value, store of value
When you are estimating your total expenses for college next year, you are using money as _____.
a measure of value/standard of value/unit of account
RECOGNIZE THESE "ALIASES"
When you put your graduation gift money in a certificate of deposit for 6 months to earn interest, you are using money as ___
a store of value
When you use your first lottery winnings to buy Christmas gifts for your teachers, you are using money as ________
a medium of exchange
It is money in its narrowest definition---currency, coins, and demand deposits
It is M1 + smaller time deposits
It is M2 + large/institutional time deposits
The US is on this type of monetary standard
inconvertible fiat money standard
It is money that has another use , such as cigarettes used for transactions in prison.
What government entity issues our paper currency?
The Federal Reserve
What government entity controls monetary policy in the US?
The Federal Reserve
He is the Chairman of the Federal Reserve
They are the three tools of monetary policy.
Open market operations, the discount rate, and the reserve requirement
When the Fed is concerned about a recession, what type of monetary policy will they pursue?
As part of expansionary monetary policy, what options does the Fed have with its 3 primary tools?
Buy securities/bonds; lower the discount rate, lower the reserve requirement
As part of contractionary monetary policy, what options does the Fed have with its 3 primary tools?
Sell securities/bonds, raise the RRR, raise the discount rate
This determines how much a bank may lend.
Its excess reserves
It is the formula for the money multiplier
1/required reserve ratio (1/RRR)
It is the interest rate that the Fed charges member banks to borrow from it
the discount rate
It is the interest rate that banks charge each other to borrow money
Federal Funds Rate
It is the equation of exchange
According to monetarist theory and the equation of exchange, what will happen to nominal GDP when the money supply increases?
nominal GDP will increase
On a bank's t-account, demand deposits will go under this category
On a bank's t-account, loans will go under this category
On a bank's t-account, the government securities that the bank owns will go under this category
If our economy is experiencing both high unemployment and high inflation, which will the Fed address FIRST?
IT IS PUBLIC ENEMY #1
When the money supply increases, interest rates will move in this direction?
If the Fed pursues a "tight money" or contractionary policy, interest rates will move in this direction
When the interest rate rises, bond values move in this direction.
**BOND VALUES AND INTEREST RATES MOVE IN OPPOSITE DIRECTIONS
If the RRR is 10%, this is the value of the money multiplier.
The demand for money is driven by these three motives.
Transactions motive, speculative motive, precautionary motive.
Of the 3 motives for money demand, it is the motive to have cash to pay for goods and services.
Of the 3 motives for money demand, it is the motive to hold cash to be prepared for cash-based investment opportunities such as bonds.
Of the 3 motives for money demand, it is the motive to hold cash for unexpected expenses.
On the money market graph, , this curve is vertical.
On the money market graph, it is on the vertical axis.
It is the formula for determining a bank's excess reserves from a deposit.
Deposit - reserve requirement
It is the formula for determining the maximum change in loans from a deposit
excess reserves x money multiplier
It is the formula for determining the maximum change in the money supply from a deposit
change in loans + amount of original deposit
It is money by government decree; it has value because the government deems it so
It is the cost of holding money (not saving it or investing it)
the interest that it could earn
Industries/businesses most likely to be impacted by changes in monetary policy
those that produce goodsand services that are interest-sensitive (usually purchased with a loan), such as durable goods such as homes and cars or services such as higher education
What actions are taken as part of FISCAL POLICY?
Who is charge of FISCAL POLICY?
Congress and the President
Does the Fed set tax rates?
Money multiplier if the RRR is 1%
Money multiplier if the RRR is 5%
Money multiplier if the RRR is 10%
Money multiplier if the RRR is 15%
Money multiplier if the RRR is 20%