| A | B |
|---|
| required reserve ratio | the percentage of money the Fed tells bank they must hold in required reserves |
| various names for bonds bought and sold by Fed | US bonds; Government bonds; securities; treasuries |
| excess reserves | money in banks that can be loaned out to customers |
| leakage | money that "leaks" out of banking system through spending |
| open market operations | when the Fed buys or sells bonds to achieve its target fed funds rate |
| nominal interest rates | real interest rate + inflation rate |
| real interest rate | nominal interest rate - inflation rate |
| expansionary monetary policy | Fed expands money supply to increase aggregate demand through lower interest rates |
| contractionary monetary policy | Fed contracts money supply to fight inflation; raises interest rates |
| interest-sensitive spending | homes, cars, appliances, business loans |
| quantity of money demanded | the demand for cash by citizens; it falls when interest rates rise because it's more profitable to keep money in bank |
| open market sales | CONTRACTIONARY |
| open market purchases | EXPANSIONARY |
| raising administered interest rate | CONTRACTIONARY |
| lowering administered interest rate | EXPANSIONARY |
| raising required reserve ratio | CONTRACTIONARY |
| lowering required reserve ratio | EXPANSIONARY |
| increase policy rate | CONTRACTIONARY |
| dual mandate (of Fed) | Fed's tasks set by Congress to promote full employment and price stability |
| Fed's normal inflation target | 2% |
| Fed's normal unemployment target | 5% |
| liability (on bank balance sheet) | anything the bank OWES someone (like demand deposits) |
| asset (on bank balance sheet) | any asset the bank OWNS (loans, reserves, bonds, etc.) |
| T-account | bank balance sheet showing balance of assets and liabilities |
| fractional reserve banking | banking system in which a bank must hold a fraction of depositor's money, then can loan out the rest |
| money multiplier | 1/Reserve Ratio; allows a bank to expand money supply by relending money out |
| inflation | decrease in the purchasing power of currency; destroys money's ability to store value |
| M1 | spendable money: cash and money in demand deposit accounts |
| M2 | M1 + money in savings accounts |
| M0 | cash |
| what does expansionary fiscal policy combined with contractionary monetary policy do to interest rates? | it jacks them up (crowding out + the Fed is shrinking money supply) |
| do you need to know what happens to interest rates and unemployment when Fed and Congress are implementing policies? | yes |
| crowding out effect | interest rates in loanable funds market go up when Congress borrows money for expansionary fiscal policy |
| devaluation of dollar | another term for inflation (rise in price level) |
| cyclical unemployment | unemployment caused by recessions |
| reserve ratio is .10; you burn $1. what is the impact on the money supply? | you destroy up to $9 worth of money (multiplier is 10; if your $1 was in a bank it could increase money supply up to $9) |
| what insures the value of dollars | full faith and credit of US government |
| LIMITED RESERVES | country with a small money supply; central bank changing money supply will change interest rates |
| quantity theory of money | theory that increasing money supply can increase short run production; but leads to long run inflation |
| AMPLE RESERVES | country with a huge money supply, changing money supply will not affect interest rates because in ample reserves there is an ocean of money |
| How could the Fed fight the effects of "crowding out?" | expansionary monetary policy |
| Reserve ratio is .10. Customer deposits $10 in bank. Max increase of money supply? | $90 (multiplier is 10, but $10 of customer money was already in money supply) |
| Reserve ratio is .10. Fed buys $10 of bonds from bank. Max increase of money supply? | $100 (multiplier is 10, all the Fed money is NEW money) |
| Is gold bullion part of M1? | NO (We aren't pirates or leprechauns) |
| If the Fed begins contractionary monetary policy, what likely happens to new home sales? | new home sales decrease because interest rates go up on mortgages |
| Does the value of the dollar depend on goods/services it can buy? | Yes, of course it does |
| How can commercial banks create money? | by lending excess reserves to customers |
| Name some commercial banks | Wells Fargo; Citibank, Bank of America |
| In a country with AMPLE RESERVES, how does the central bank do monetary policy? | change administered policy interest rates |
