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Flashcards in Exam 4 Deck (17)
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1
Q

Three Functions of Money

A
  1. Medium of Exchange
  2. Store Value
  3. Unit of Account
2
Q

Definition of M1

A

paper currency, coins, traveler’s checks, and checking account balances

3
Q

Appox. size of M1 and M2 today

A

M1: $2.5 trillion
M2: $11.5 trillion

4
Q

Definition of M2

A

all of M1, plus long-term savings, mutual funds, money market funds

5
Q

Taylor Rule

A

what the Fed uses to calculate the optimal FFR should be

=inflation rate+avg. LT FFR+half inflation gap+half RGDP gap

6
Q

Federal Funds Rate

A

interbank lending rate (>$1 million), usually overnight

0-.25% today

7
Q

Prime Rate

A

rate banks charge preferred customer

3.25% today

8
Q

Discount Rate

A

rate Fed lends to member banks (lender of last resort)

.75% today

9
Q

Five interest rates:

A
  1. Federal Funds Rate
  2. Prime Rate
  3. Discount Rate
  4. Mortgage Rate
  5. T-bill rate
10
Q

Three reasons to hold money

A
  1. Transaction Demand
  2. Speculation Demand
  3. Precautionary Demand
11
Q

Six Methods for Fed to manipulate money supply

A
  1. Open-market operations
  2. Change reserve requirements
  3. Discount Rate
  4. Term Auction Facility
  5. Interest Payments on reserves
  6. Quantitative Easing
12
Q

Seven Functions of the Fed:

A
  1. Issuing currency
  2. Setting reserve requirements
  3. Lending to Financial institutions and serving as an emergency lender
  4. Providing for check collection
  5. Acting as a fiscal agent; provides financial services for the federal government
  6. Supervising banks
  7. Controlling the money supply
13
Q

What two feature of our banking system allow banks to create money?

A
  1. Fractional Reserve System

2. Checking deposits are included in the money supply

14
Q

Money Multiplier

A

how much of every dollar deposited can be made into “new” money
=1/RR

15
Q

Why is the supply of money so important?

A

the amount of money in an economy determines the interest rates for investment and some consumer spending, which in turn affects RGDP and whether the economy is in recession or inflation

16
Q

Pros of Monetary Policy (4)

A
  1. quicker to implement
  2. isolated from politics
  3. doesn’t increase debt
  4. more subtle (better for inflation)
17
Q

Cons of Monetary Policy (4)

A
  1. Long operational lag
  2. not as effective in a recession
  3. liquidity trap
  4. doesn’t help unemployed