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Money
anything that serves as a medium of exchange, a measure of value, and a store of value
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Commodity Money
- alternative money
- ex. gold and goat
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Fiat Money
money by government decree
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Characteristic of Fiat Money
- -portable
- -durable
- -divisible
- -limited availability (prevents inflation)
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M1
money supply components conforming to money's role as medium of exchange
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M2
money supply components conforming to money's role as a store of value
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Fractional Reserve System
system requiring financial institution to set aside a fraction of their deposits in the form of reserves
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Reserve Requirement
formula used to compute the amount of a depository institution's required reserves
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Legal Reserves
currency and deposits used to meet the reserve requirement
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Reserve Requirement Calculation
- Deposit x RR= Total Reserves
- 1000 x .20=200 (Money to Reserve)
- 1000-200=800 (Money to Lend)
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Money Supply Calculations
- Total Deposit/RR=Money Supply
- 1000/.20=5000
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The Federal Reserve
consists of 12 district (regional) banks that operate independently of each other, but coordinated by a board in Washington, D.C.
-is privated owned
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Board of Governors
- regulate of supervisory agency
- -appointed by the president for 14 year terms
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Federal Open Market Committee (FOMC)
- -makes decision on growth of monetary supply & level of interest rates
- -consists of seven members of Board of Gov., five district banks presidents (one is always the president of NY Fed)
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Monetary Policy
- -actions by the federal reserve system to expand or contract the money supply in order to affect the cost and availability of credit
- -Fed believes in this ____(using money supply as way of helping the economy) so they used _____ policy
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Reserve Requirement
- banks must have a fraction of deposits in reserve (10%)
- -High RR=Less $
- -Low RR=More $
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Discount Rate
- interest rate the Federal Reserve System charges on loans to financial institutions
- -High DR=Less $
- -Low DR=More $
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Open Market Operations (most used)
- monetary policy in the form of bond sales or purchases in bond markets
- -Buy Securities=More $
- -Sell Securities=Less $
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Easy Money Policy
expand money supply
- a) short term impact- interest rate lower, credit is cheaper
- b) long term impact- inflation
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Tight Money Policy
shrink money supply
- a) short term impact- fed shrinks money supply, interest rates rise
- b) long term impact- credit is more expensive
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