Monetary Policy and Causes of the Recession

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Author:
AshleyCoates
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218768
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Monetary Policy and Causes of the Recession
Updated:
2013-05-09 10:33:00
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MacroEcon
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Notes for final chapters
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  1. Barter transactions require a coincidence of wants, which:
    the unlikely occurrence that 2 people each have a good that the other wants
  2. Without money, trade would require
    barter
  3. Barter
    the exchange of 1 good or service for another
  4. Medium of Exchange
    An item buyers give to sellers when they want to buy purchase g&s
  5. Unit of Account
    the yardstick people use to post prices and record debts
  6. Store of Value
    An item people can use to transfer purchasing power from the present to the future
  7. The 3 Functions of Money
    • Medium of Exchange
    • Store of Value 
    • Unit of Account
  8. The 2 Kinds of Money
    • Commodity 
    • Fiat
  9. Commodity Money
    • Takes the form of a commodity with intrinsic value
    • e.g.; gold coins, cigarettes in POW camps
  10. Fiat Money
    • Money without intrinsic value, used as money because of govt decree
    • e.g.; the U.S. dollar
  11. Money Supply (money stock)
    the quantity of money available in the economy
  12. What assets are considered part of the money supply?
    Currency and demand deposits
  13. Currency
    the paper bills and coins in the hands of the (non-bank) public
  14. Demand deposits
    Balances in bank accounts that depositors can access on demand by writing a check
  15. Measures of the U.S. Money Supply
    • M1: currency, demand deposits, and other checkable deposits
    •   $1.9 Trillion (February 2011)
    • M2: everything in M1 plus savings deposits, small time deposits, money market mutual funds
    •   $8.9 Trillion (February 2011)
  16. Central Bank
    An institution that oversees the banking system and regulates the money supply
  17. Monetary Policy
    The setting of the money supply by policymakers in the central bank
  18. The Federal Reserve System (The Fed)
    the central bank of the U.S.
  19. The Structure of the Federal Reserve System
    • Board of Governors (7 Members): located in Washington, DC
    • 12 Regional Fed Banks: located around the U.S.
    • Federal Open Market Committee (FOMC): Includes the Board of Governors and president of some of the regional Fed banks
  20. Who decides Monetary Policy?
    FOMC, Federal Open Market Committee
  21. Fractional Reserve Banking System
    Banks keep a fraction of deposits as reserves and use the rest as loans
  22. The Fed establishes Reserves Requirements, which are regulations on
    the minimum amount of reserves that banks must hold against depositors
  23. Reserve Ratio (R)
    • Fraction of deposits that banks hold as reserves 
    • total reserves as a percentage of total deposits
  24. What caused the crisis?
    • The housing Bubble 
    • A speculative buying frenzy
    • Complete failure by the major financial ratings agencies
    • Rqegulatory failure
  25. During 1929-1933,
    a wave of bank runs and bank closings caused money supply to fall 28%
  26. 28% fall in money supply during 1929-1933 believed to have
    • Contributed to the severity of the great depression
    • Since, federal deposit insurance helped prevent bank runs
  27. Under fractional reserve banking,
    banks dont have enough reserves to pay off all depositors, hence banks may have to close
  28. Money Supply Equation
    Money Multipiler * Bank Reserves

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