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...
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