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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.
Economic growth comes from increases in what? Human capital and physical capital.
Savings equals what? Investment spending.
In an open economy, investment spending equals what? National savings + capital inflow.
What is capital inflow? Net inflow of funds into a country.
Main types of financial assets? Loans, bonds, loan-backed securities, stocks, bank deposits.
Relationship between bond prices and interest rates? Inversely related (rates up → bond prices down).
What is a financial intermediary? An institution that connects savers and borrowers.
Examples of financial intermediaries? Mutual funds, life insurance companies, pension funds, banks.
Why do banks exist (3 reasons)? Reduce transaction costs, reduce risk, provide liquidity.
Inflation rate formula? [(PL Year 2 − PL Year 1) / PL Year 1] × 100.
Does inflation automatically make everyone poorer? No; wages and prices may rise together.
What is nominal interest rate? Interest rate not adjusted for inflation.
What is real interest rate? Nominal interest rate − inflation rate.
If inflation is higher than expected, who wins/loses? Borrowers win; lenders lose.
If inflation is lower than expected, who wins/loses? Lenders win; borrowers lose.
National savings formula? Private savings + budget balance.
National savings is made of what? Public savings + private savings.
What does liquid mean? Can be converted to cash with little/no loss in value.
Most liquid asset? Cash -> currency
What is money? Any asset accepted as a means of payment.
3 functions of money? Medium of exchange, unit of account, store of value.
What is commodity money? Money that has intrinsic value.
What is commodity-backed money? No intrinsic value, but can be exchanged for valuable goods.
What is fiat money? Money with value because the government says it does.
What is M1? Currency in circulation + traveler’s checks + checkable bank deposits.
What is M2? M1 + near-moneys (savings accounts, time deposits, small CDs).
Is $1 today worth more than $1 in the future? Yes; inflation reduces purchasing power over time.
Net Present Value (NPV) formula? PV of benefits − PV of costs
What do banks do with deposits? Keep part as reserves and lend the rest.
What are T-accounts used for? Showing assets and liabilities.
What is a bank run? Many depositors demand money at the same time.
What causes bank runs? Rumors/fear of bank failure.
What is deposit insurance? Guarantees the first $250,000 of each bank account.
What are reserve requirements? Banks must maintain the required reserve ratio.
What is the discount window? The Fed lends money to banks.
What are capital requirements? Bank assets must be greater than deposits.
How can banks increase the money supply? By making loans and creating money (multiplier process).
Money multiplier formula? 1 / reserve ratio.
Total increase in checkable deposits formula? Excess reserves / reserve ratio.
What are excess reserves? Reserves held above the required amount.
What does the money market determine? Short-term nominal interest rate.
What drives money demand? Opportunity cost of holding money and short-term interest rates.
Money demand shifts when what changes? Price level, real GDP, technology, institutions.
If price level rises, what happens to money demand? Money demand increases.
If real GDP rises, what happens to money demand? Money demand increases.
If technology improves (easier transfers), what happens to money demand? Money demand decreases.
Who chooses the money supply? The Federal Reserve.
Is the money supply curve vertical? Yes; the Fed sets it and it doesn’t depend on interest rates.
Equilibrium in the money market occurs when… Money demand = money supply.
3 main monetary policy tools? Reserve requirement, discount rate, open-market operations.
Lower reserve requirement does what? Increases money supply.
Lower discount rate does what? Increases money supply.
Fed buying T-bills does what? Increases money supply.
Who supplies loanable funds? Savers/lenders.
Who demands loanable funds? Borrowers.
What shifts demand for loanable funds? Business opportunities and government borrowing.
If businesses become optimistic, what happens to demand? Demand increases.
If government borrowing increases, what happens to demand? Demand increases.
What shifts supply of loanable funds? Private saving behavior and capital inflows.
If people save more, what happens to supply? Supply increases.
If foreign investors are optimistic about a country, what happens? Capital inflow increases → supply increases.
What is the Fisher Effect? Expected inflation rises → nominal interest rate rises.
If expected inflation falls, what happens to nominal interest rates? They fall.
4 main functions of the Fed? Financial services, supervise banks, maintain stability, conduct monetary policy.
Expansionary monetary policy actions? Lower reserve requirement, lower discount rate, buy T-bills.
Contractionary monetary policy actions? Raise reserve requirement, raise discount rate, sell T-bills.
Which tool has the greatest effect on money supply? Open-market operations.
Created by: abeutner26
 

 



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