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Money
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Stocks
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Bonds
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something used to facilitate the exchange of goods and services
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shares in the ownership of a business
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a certificate of debt issued by a business or a government
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money is measured in liquidity. M1 is the highest liquidity (coins, cash, cd)
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open market operations
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Government Spending
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Income Taxes
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Increase in gov. spending leads to more income = more consumption
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Tax reductions lead to more consumption.
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More consumption leads to more investments by firms.
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Firms can produce more, which leads to greater investments.
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-independent regulatory agency
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-#1 Goal: control the money supply
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there are 7 board members who all serve 14 year terms
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-US central bank
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-also, to stabilize the banking system
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they are chosen by the president
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-created by the Federal Reserve Act of 1913
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Aggregate Demand
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Aggregate Supply
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Consumption
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Inflationary expectations
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Investments
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Resource prices
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Government spending
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Actions of the government
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Xports (net)
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Productivity
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What does the money supply mean?
The money supply is the money in the economy at M1.
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In a money market graph, why is the Money Supply curve vertical?
Money supply is independent of interest rates because it is determined by monetary policy actions of the Fed
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What are the shifters of money supply?
1. setting reserve requirements, 2. setting federal funds rate, 3. setting discount rates, 4. open market operations
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After banks receive deposits from their customers, they put away enough to meet required reserves.
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The rest of the money in their excess reserves, they can loan out.
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That loan gets spent in the economy.
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This means they created money because they have the same money in one person's savings that they loaned out, and that went into the economy.
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Why is money demanded in an economy?
1. to perserve wealth in liquid form and 2. to use in transactions the market
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What does the demand curve look like?
Lower interest rates lead to a higher demand for money. The curve is downward sloping.
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What are the shifters of money demand?
1. Technology, 2. Real GDP, 3. Institutions, 4. Price Level (TRIP)
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The Discount Rate
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Rate the Fed charges banks to take out overnight loans from them.
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Federal Funds Rate
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Rate banks charge other banks to take out overnight loans
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Open Market Operations
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The Fed buying and selling bonds
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Big Money=Buy; Small Money=Sell
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Quantity Theory of Money
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MV = PQ
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Money Multiplier
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1/RR
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