Exam 2: Ch. 8

Question 1

M1 =

Answer 1

(coins and currency in circulation) + (checking account balances OR demand deposits) + (travelers checks)

Question 2

M2 =

Answer 2

M1 + (small acct balances + savings acc balances + MMMF)

Question 3

MMMF

Answer 3

money market mutual funds

- buy and sell treasury bills

Question 4

treasury bills

Answer 4

government bonds that matures in 30/60/90 days

Question 5

circulation flow diagram

Answer 5

• money goes to households when they are paid salary, and money goes back to businesses when households buy things

Question 6

a very important equation

Answer 6

M x V == P x Y

Question 7

M

Answer 7

nominal money supply, how much money exists, could be M1 or M2

Question 8

V

Answer 8

velocity of money - number of circulation flows/year for each dollar

Question 9

if V=6, then

Answer 9

2 times/year

Question 10

if V=3, then

Answer 10

4 times/year

Question 11

P x Y

Answer 11

nominal GDP

Question 12

P =

Answer 12

GDP deflator or price level

Question 13

Y =

Answer 13

real GDP

Question 14

notes about V

Answer 14

• V rises when we use credit / charge things

Question 15

M / P

Answer 15

money in economy / GDP deflator

Question 16

M / P =

Answer 16

real money supply

Question 17

difference between money in economy and real money supply

Answer 17

M = money in economy (M1 or M2)
M/P = real money supply

Question 18

the very important equation exists, THEREFORE:

Answer 18

%changeM + %changeV == %changeP x &changeY

Question 19

%change M =

Answer 19

monetary growth rate

Question 20

%changeV =

Answer 20

percentage change in V

Question 21

%changeP =

Answer 21

inflation rate

Question 22

%changeY

Answer 22

economic growth rate

Question 23

equation used to predict inflation rate:

Answer 23

%changeP = %changeM + %changeV - %change Y

Question 24

M = (words)

Answer 24

money supply

Question 25

M =

Answer 25

[(1+ cr) / (rrr + err + cr)] x (MB)

Question 26

[(1+ cr) / (rrr + err + cr)] =

Answer 26

money multiplier | - which is greater than 1

Question 27

rrr =

Answer 27

required reserve ratio

Question 28

err =

Answer 28

excess reserve ratio

Question 29

cr =

Answer 29

currency ratio

Question 30

MB = (words)

Answer 30

monetary base

Question 31

MB =

Answer 31

currency in circulation + vault cash + bank reserves with the FED

Question 32

currency in circulation + vault cash

Answer 32

total currency issues

Question 33

vault cash + bank reserves with the FED

Answer 33

total bank reserves

Question 34

The FED often alters ____

Answer 34

MB

Question 35

The FED often alters MB, which causes

Answer 35

change M > change MB

Question 36

sometimes the FED alters ____

Answer 36

rrr

Question 37

sometimes the FED alters rrr, which causes

Answer 37

change money multipliers that leads to change in M

Question 38

The FED has ____ district banks

Answer 38

12

Question 39

We are in the _______ district

Answer 39

Cleveland

Question 40

The FED is run by ___ members, who are called the _______

Answer 40

The FED is run by 7 members, who are called the Board of Governors

Question 41

Who is the chair of the Board of Governors for the FED?

Answer 41

Janet Yellen = first woman chair

Question 42

What are the three functions of the FED?

Answer 42

1. regulates banks 2. clears checks 3. influences M and i

Question 43

1. regulates banks

Answer 43

- rrr=requires reserve ratio - must have government bonds - safe loans --> bank examiner

Question 44

What are the three objectives of the FED?

Answer 44

1. max employment (keep GDP high) 2. low and stable inflation 3. orderly financial markets 4. no big speculative bubbles (greater fool syndrome)

Question 45

What is the first tool the FED uses?

Answer 45

1. change in discount: DR rises --> Bks borrow less --> M falls + i rises ( changes discount rate to encourage/discourage people to buy/buy less) - FED will raise i because our GDP is close to Yp

Question 46

Second tool the FED uses?

Answer 46

change in rrr: rrr rises --> Bks lend less --> M falls and i rises

Question 47

Third tool the FED uses?

Answer 47

open market operations | - FED buys bonds --> MB rises --> M rises and i falls