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Macro Unit 3

Key terms

QuestionAnswer
Medium Of exchange any item sellers generally accept and buyers generally use to pay for a good or service; money; a convenient means of exchanging goods and services without engaging in barter
store of value an asset set aside for future use; one of the three functions of money
asset demand for money the amount of money people want to hold as a store of value; this amount varies inversely with the interest rate
money market the market in which the demand for and the supply if money determine the interest rate (or the level of interest rates) in the economy
reserve ratio The portion (expressed as a percent) of depositors' balances banks must have on hand as cash. This is a requirement determined by the country's central bank, which in the U.S. is the federal reserve.
federal funds rate the interest rate banks and other depository institutions charge one another on overnight loans made out of their excess reserves
Open Market Operations the buying and selling of U.S government securities by the federal reserve banks for purposes of carrying out monetary policy
easy money policy federal reserve system actions to increase the money supply to lower interest rates and expand real GDP
tight money policy federal reserve system actions that contract, or restrict, the growth of the nations money supply for the purpose of reducing or eliminating inflation
Prime interest rate the benchmark interest rate that banks use as a reference point a wide range of loans to businesses and individuals
Phillips Curve a curve showing the relationship between the unemployment rate (on the horizontal axis) and the annual rate of increase in the price level (on the vertical axis)
Aggregate supply shock sudden large changes in resource costs that shift an economies aggregate supply curve
unit of account a standard unit in which prices can be stated and the values of goods and services can be compared; one of the three functions of money
M1,M2, M3 narrowly defined M1 more broadly defined M2 and M3
total demand for money the sum of the transactions demand for money and the asset demand for money
required reserve the funds that banks and thrifts must deposit with the federal reserve bank (or hold as vault cash) to meet the legal reserve requirement; a fixed percentage of the banks or thrifts check able deposits
excess reserve the amount by which a banks thrifts actual reserves exceed its required reserves; actual reserves minus required reserves
money multiplier the multiple of its excess reserves by which the banking system can expand check able deposits thus the money supply by making new loans (or buying securities) equal to 1 divided by the reserve requirement
discount rate the interest rate that the federal reserve banks charge on the loans they make to commercial banks and thrift institutions
federal funds rate the interest rate banks and other depository institutions charge one another on overnight loans made out of their excess
velocity of money the number times per year that the average dollar in the money supply is spent for final goods and services; nominal GDP divided by the money supply
Laffer curve a curve relating government tax rates and tax revenues and on which a particular tax rate (between zero and 100 percent) maximizes tax revenues
Created by: Rmenendez12