Econ 3 notes

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Econ Notes 3:
Exam Thursday, March 27th

Chapter 16: Money

Money- used to purchase things
Weath- not money until converted into form that can be used to purchase things Liquidity- Purchasing power

Functions of Money: (515)
1. Medium of exchange
2. Store of Value- can store it
3. Unit of account - way of establishing relative value
4. A Standard of Differed Payment- allows exchange over period of time

Our Money
Commodity Money- money that has value outside of being used for money •Fiat Money- No value outside of being money (Every major currency)

Monetary Aggregates
M1- ($2.68 trillion) Currency, coins, checking account,travelers checks •M2-($11.13 trillion) Everything in M1 plus sav acct, money mkt acct, money mkt mutual funds, small CDs

Money Vs. Credit
Debit card- Access to own money
Credit card- Access to pre-arranged loan

1. Money in checking and sav acct is part of money supply
2. When money is deposited bank loans it out, not all of it
3. Bank keeps reserve
4. Required reserve is amount of reserve bank must keep by law 5. Required reserve ratio is amount as percent
The smaller the Required reserve ratio, the higher the money supply •Excess Reserves- Money that can be loaned but isn't

Simple money multiplier (222-228)
= (1/reserve requirement) x original amount deposited
-determines Money supply, including Original deposit

Money multiplier with currency
1. People don't keep all money in bank
2. Affects money that can be created
3. Larger % people keep out as currency= smaller multiplier
(1+Percent kept as currency) / (Reserve requirement+Percent kept as currency) x original amount

Constraints on Money creation:
1. Deposits- deposits have to be there
2. Willing borrowers- have to be people interested in borrowing money 3. Willing lenders- banks have to be willing to lend

Monetary policy
Using money supply and interest rates to influence certain macroeconomic activity Conducted by federal reserve

The fed (federal reserve)- central bank of us
It's job is too:
1.governments bank
2. Regulate and oversee commercial banks
3. Control money supply
4. Keep prices controlled and keep economy strong
Established in 1913 to create confidence in our currency and banking system Before 1913 anyone could print money

The Fed in 3 Parts (529)
1. Board of governors- oversees 12 regional banks. In charge of monetary policy and banking supervision 2. 12 regional banks- involved in bank supervision
3. 7 members Of board of governors and 5 regional bank presidents- make up federal open market committee

Who controls the fed?
1. President appoints 7 members of board of governors
2. Chairman approved by senate
3. After being approved. They don't need anyone's authority to act 4. Provide reports to congress but does not report to congress

How can and does fed control money supply (531)

Three ways fed increases Money supply:
1.Reducing Reserve requirment
2.Buying bonds
3.Lowering target for fed fund rate

Three ways fed decrease Money supply:
1.Increasing Reserve requirment
2.Selling bonds
3.Incresing target for fed fund rate

1. Setting reserve requirement
Current reserve requirements:
If institution has 89 m: 10%
Financial services regulatory relief act(2006)= allowed fed to reduce requirement to 0 Taking effect in 2011

2. Buying and selling bonds (Open market operations)
- buys increases supply
- sells decrease
Bond- IOU
every year pay u percent of amount borrowed
pay Original amount back after 10 years
when US needs money they issue bonds, not print money
When the price of a bond goes up, the rate it pays goes down. •When the price of a bond goes down, the rate it pays goes up. Instruments of monetary policy;
1. Open market operations- buying and selling of government securities When the fed sells a bond
Fed hands over IOU to bank
Amount of money out there is reduced

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