Unit 5

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Unit 5
2010-01-05 18:13:59

Managing the Nation's Economy
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  1. Money
    anything that serves as a medium of exchange, a measure of value, and a store of value
  2. Commodity Money
    • alternative money
    • ex. gold and goat
  3. Fiat Money
    money by government decree
  4. Characteristic of Fiat Money
    • -portable
    • -durable
    • -divisible
    • -limited availability (prevents inflation)
  5. M1
    money supply components conforming to money's role as medium of exchange
  6. M2
    money supply components conforming to money's role as a store of value
  7. Fractional Reserve System
    system requiring financial institution to set aside a fraction of their deposits in the form of reserves
  8. Reserve Requirement
    formula used to compute the amount of a depository institution's required reserves
  9. Legal Reserves
    currency and deposits used to meet the reserve requirement
  10. Reserve Requirement Calculation
    • Deposit x RR= Total Reserves
    • 1000 x .20=200 (Money to Reserve)
    • 1000-200=800 (Money to Lend)
  11. Money Supply Calculations
    • Total Deposit/RR=Money Supply
    • 1000/.20=5000
  12. 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
  13. Board of Governors
    • regulate of supervisory agency
    • -appointed by the president for 14 year terms
  14. 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)
  15. 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
  16. Reserve Requirement
    • banks must have a fraction of deposits in reserve (10%)
    • -High RR=Less $
    • -Low RR=More $
  17. Discount Rate
    • interest rate the Federal Reserve System charges on loans to financial institutions
    • -High DR=Less $
    • -Low DR=More $
  18. Open Market Operations (most used)
    • monetary policy in the form of bond sales or purchases in bond markets
    • -Buy Securities=More $
    • -Sell Securities=Less $
  19. Easy Money Policy
    expand money supply

    • a) short term impact- interest rate lower, credit is cheaper
    • b) long term impact- inflation
  20. 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