Money: asset that can be used in making purchases Roles of money Medium of exchange: asset to purchase a good or service

Store of value: asset used as a means to hold wealth Unit of account: Basic measure of an economic value Measuring the money supply – M1: sum of currency out standings and balances held in checking accounts Bank reserves: cash or similar assets held by commercial banks for the purpose of meeting depositors withdrawals and payments. Creation of money by commercial banks: CD's Federal Reserve: Central Bank in US Open market operations: FOMC makes decisions concerning monetary policy Money Supply = currency helped by the public + Bank deposits Bank deposits = Bank reserves / desired reserve-deposits ratio When the Fed sells government securities, the banks reserves will decrease and lending will contract causing a decrease in the money supply. Money supply and inflation: rate of growth of Money Supply equals rate of inflation Velocity of money: Speed of the circulation of money Quantity equation/equation of exchange: M x V = GDP = P x Q M = Money Stock, P = Price Level, Y = Real GDP Capital flows: (inflow - outflow) inflows: purchase domestic by foreign outflows: purchase foreign assets by domestic Potential output: max amount an economy can produce Y*. Output gaps = Y* - Y (potential out) if Output gap is positive: recessionary gap negative: expansionary gap (could cause an inflation) Natural rate of unemployment: frictional and structural unemployment Cyclical unemployment: unemployment in recessions Cyclical unemployment= u (actual unemployment)– u*(natural rate of unemployment) Income-expenditure multiplier: multiplier of a short run equilibrium Keynesian cross diagram of PAE and Y

Fiscal policy: government budget and how much tax input Stabilization: government policies affect aggregate expenditure to eliminate output gaps Get rid of Recession: tax cuts and increased government expenditures. Problems with fiscal policy as a stabilization tool: doesn't have effect on money supply Monetary policy and the Fed: sell bonds reduces Money Supply and increase nominal Tools to regulate money supply: the Fed controls nominal by changing money supply.

Reserve requirement: min values of ratio of bank deposits that commercial banks are allowed to maintain Discount rate: interest rate on commercial banks to borrow reserves Fed and interest rates Demand for money holdings (basic idea, not calculation) Factors that affect demand for money holdings Money demand curve Fed’s money supply curve Graphing money holdings (nominal interest rate) Federal Funds rate Fed and short run real interest rate Aggregate Demand, idea and graph Aggregate Supply, ideas and graphs AD-AS graph Equilibrium in the AD-AS market

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