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Chapter 4 Macro 3302
Terms in this set (18)
What is the definition of money?
the stock of asset that can be readily used to make transactions
What are the two types of money?
1. Fiat Money: no intrinsic value (ie paper money)
2. Commodity money: intrinsic value (ie gold coins or cigs in POW camp)
What is the Money Supply?
The quantity of money available in the economy
What is Monetary policy?
controls the money supply which is conducted by the central bank
How does the Fed control the money supply?
open market operations of buying and selling of government bonds
What are the money supply measures?
M1= C+ demand deposits/ traveler's checks/checkable deposits
M2= M1+ small time deposits/ savings/ mutual funds
what are reserves (R)?
the portion of deposits that banks have not lent
What is 100% reserve banking?
banks that holds all deposits as reverse
What is fraction reserve banking?
banks that hold a fraction of deposits as reserves
How can banks create money?
using 1/rr where rr= ratio of reserves to deposits
What is a bank's capital?
the resources a bank has put into the bank
What is leverage? What is the leverage ratio?
leverage is the use of borrowed money supplement existing funds for investment
leverage ratio= assets/capital
what is the capital requirement?
the minimum amount of capital banks must have on hand
What are the exogenous variables within the monetary policy?
- monetary base: B=C+R controlled by central bank
- Reserve-Deposit ratio: rr= R/D controlled by regulations and bank policies
- Currency-Deposits ratio: cr=C/D controlled on households' preferences
What are the Instruments of monetary policy?
Open market operations
interest on reserves
What is the discount rate?
the interest rate the Fed charges on loans to banks
What is the reserve requirement?
the imposed minimum reserve- deposit ratio
what is the Interest on reserves?
the amount the Fed pays for interest on bank reserve deposited with the fed
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