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4.3-4.5 Macro Quiz

QuestionAnswer
Money Anything widely accepted as payment for goods and services.
Medium of exchange Money used to buy and sell goods/services; avoids barter.
Unit of account Money measures value and allows prices to be compared.
Store of value Money holds purchasing power over time.
Fiat money Money with value because the government declares it legal tender.
Commodity money Money with value on its own (ex: gold).
M1 The most liquid money: cash, coins, checking deposits.
M2 M1 plus savings accounts, money market accounts, and small CDs.
Fractional reserve banking System where banks keep some deposits and loan out the rest.
Required reserve ratio (RRR) The percent of deposits banks must hold and cannot loan out.
Required reserves The minimum amount of reserves banks must keep by law.
Excess reserves Reserves banks can loan out to borrowers.
Bank reserves Cash in the vault + deposits held at the Federal Reserve.
Money creation When banks make loans, new deposits are created and the money supply rises.
Bank assets What a bank owns (loans, reserves, securities).
Bank liabilities What a bank owes (customer deposits).
Why deposits are liabilities Customers can withdraw deposits, so the bank owes that money.
Money multiplier Shows how much the money supply can increase from a new deposit.
Money multiplier formula 1 / reserve requirement.
Maximum money supply change New deposit × money multiplier.
Reserve requirement increases effect Money multiplier decreases; banks lend less; money supply decreases.
Reserve requirement decreases effect Money multiplier increases; banks lend more; money supply increases.
Why the multiplier may be smaller in real life Banks may hold extra reserves or people may keep cash instead of depositing.
Federal Reserve (Fed) The central bank of the United States.
Monetary policy Fed actions to change the money supply and interest rates.
Fed goals Low inflation, low unemployment, and stable economic growth.
Open market operations (OMO) Fed buying and selling U.S. government bonds.
Fed buys bonds effect Bank reserves increase; money supply increases; interest rates fall; investment rises; AD rises.
Fed sells bonds effect Bank reserves decrease; money supply decreases; interest rates rise; investment falls; AD falls.
Reserve requirement tool The Fed changes the % of deposits banks must hold (rarely used).
Discount rate The interest rate the Fed charges banks to borrow money.
Discount rate decreases effect Banks borrow more; reserves increase; money supply increases.
Discount rate increases effect Banks borrow less; reserves decrease; money supply decreases.
Expansionary monetary policy Used to fight recession by increasing the money supply and lowering interest rates.
Contractionary monetary policy Used to fight inflation by decreasing the money supply and raising interest rates.
AP Macro chain (expansionary) Money supply ↑ → interest rates ↓ → investment ↑ → AD ↑.
AP Macro chain (contractionary) Money supply ↓ → interest rates ↑ → investment ↓ → AD ↓.
Investment (I) in GDP Business spending on capital like factories, machines, and equipment.
Created by: abeutner26
 

 



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