Economics Module 5 Practice HW

A central bank is a public authority that provides banking services to banks and governments and regulates financial institutions and markets. In the United​ States, the central bank is the Federal Reserve System.

The discount rate is the interest rate at which the Fed stands ready to lend reserves to commercial banks. The discount rate is one of the​ Fed's policy tools.

The Federal Open Market Committee​ (FOMC) is the​ Fed's main​ policy-making committee. The FOMC meets approximately every six weeks to review the state of the economy.

An open market operation is the purchase or sale of government securities by the Federal Reserve System in the open market.

Reserves consist of the currency in the​ bank's vaults plus the balance on its reserve account at a Federal Reserve Bank.

The Federal funds rate is the interest rate on interbank loans​ (loans made in the federal funds​ market).

The Federal Open Market Committee is the​ Fed's main policy making committee.

Banks are required to hold an amount equal to the required reserve ratio multiplied by deposits. When the required reserve ratio​ increases, banks must hold more required reserves. Banks loan out excess reserves. When required reserves​ increase, excess reserves​ decrease, and the quantity of loans decreases.

If the​ People's Bank of China wants to increase the quantity of​ money, it makes an open market purchase. The​ People's Bank of China increases the reserves of the banks. Reserves in the banking system increase. Banks make more loans because they have excess reserves. When the​ People's Bank of China makes an open market​ purchase, bank deposits increase because loans increase. Money includes bank​ deposits, so the quantity of money increases.

The banking system creates money because a bank that has excess reserves can make loans. When a bank creates a​ loan, the bank increases the balance of the​ borrower's account and that increase in deposits is new money.

If the Fed makes an open market sale of​ $1 million of securities to a​ bank, the bank pays for the securities with bank reserves. The​ bank's reserves decrease. Excess reserves decrease. Excess reserves have decreased so the bank calls in loans and makes fewer loans. When the bank calls in loans and makes fewer​ loans, bank deposits decrease and the quantity of money decreases.

Excess reserves are a​ bank's actual reserves minus its desired reserves.

Money multiplier is the number by which a change in the monetary base is multiplied to find the resulting change in the quantity of money.

The velocity of circulation is the average number of times in a year that each dollar of money gets used to buy final goods and services.

Money is any commodity or token that is generally accepted as a means of payment.

Money in the United States today consists of currency and deposits at banks and other financial institutions. Ex: people's wallets, bank deposits, stores tills

M1 consists of currency held by individuals and​ businesses, travelers' checks and checkable deposits owned by individuals and businesses. When Rick withdraws​ $500 from his savings​ account, keeps​ $100 as​ currency, and deposits​ $400 in his checking​ account, M1 increases by​ $500. But M2 does not change. M2 consists of M1 plus other types of deposits.

Money multiplier​ = (1​ + C​/D​) divided by ​(R​/D​ + C​/D​) where C​/D is the currency drain ratio and R​/D is the desired reserve ratio. So an increase in the desired reserve ratio decreases the money multiplier.

The quantity theory of money is the proposition that when real GDP equals potential​ GDP, an increase in the quantity of money brings an equal percentage increase in the price level. And when the price level​ rises, nominal​ GDP, which equals the price level multiplied by real​ GDP, also increases.

A budget balance is tax revenues minus outlays. If tax revenues are​ $3,500 billion and the​ government's budget balance is a​ $720 billion​ deficit, then the​ government's outlays equal tax revenues plus the budget​ deficit, which is​ ($3,500 +​ $720) billion​ = $4,220 billion.

National debt is the amount of government debt outstanding​ - debt that has arisen from past budget deficits.

Monetary policy includes changing the quantity of money and the interest rate. The fact that the Fed has raised the federal funds rate by 0.3​ percent, implies a change in the interest rate. So it illustrates monetary policy.

National debt is the amount of government debt outstandinglong dashdebt that has arisen from past budget deficits. So U.S. national debt increases when the government has a budget​ deficit, and the government has a budget deficit when outlays exceed tax revenue.

The​ Fed's "dual​ mandate" is to achieve stable prices and maximum employment. The goal of​ "stable prices" means keeping the inflation rate low and predictable. The goal of​ "maximum employment" means keeping the unemployment rate close to the natural unemployment rate.