Macroeconomics Chapter 9 example #41258

An item that sellers generally accept and buyers generally use to pay for goods and services

A standard measurement unit in terms of which prices can be stated and the relative value of goods and services compared.

An asset set aside to purchase items in the future.

The narrowest definition of the U.S. money supply. It consists of: Currency in the hands of the nonbank public All checkable deposits

A broader definition of money and includes M1 plus several near-monies. The categories of near-monies owned by individuals are: Saving deposits Time deposits Money market mutual funds

Certain highly liquid financial assets that do not function directly or fully as a medium of exchange but can be readily converted into currency or checkable deposits.

The U.S. money supply is guaranteed by the government's ability to keep the value of money relatively stable.

Its acceptability, legal tender designation, and relative scarcity.

Legal designation of a nation's official currency (bills and coins).

Purchasing power of the dollar varies inversely with the price level.

The amount of goods and services a unit of money will buy.

When the government prints too much money, the purchasing power of money declines. Also, runaway inflation may significantly reduce the purchasing power of the dollar and may cause it to cease being used as a medium of exchange.

A key element of the U.S. banking system

A seven-member group that supervises and controls the money and banking system of the U.S.

12 banks chartered by the U.S. government to control the money supply and perform other functions. They collectively serve as the nation's "central bank" and also serve as bankers' bank. (Most nations have a single central bank.)

The 12 member Federal Reserve group that determines the purchase and sale policies of the Federal Reserve Banks in the market for U.S. securities in order to conduct the monetary policy.

Issues currency Sets reserve requirements and holds reserves Lends money to banks and thrifts Provides the banking system with a means for collecting checks Acts as a fiscal agent for the Federal government Supervises the operation of banks Controls the money supply and thus indirectly sets interest rates

This protects the Fed from political pressure so that it could effectively control the money supply and interest rates to foster price-level stability.

One in which banks and thrifts are required to hold less than 100 percent of their checkable-deposit liabilities as cash reserves.

Required Reserves, The amount of required reserves is determined by the reserve ratio (R).

An amount of funds equal to a specified percentage of the bank's own deposit liabilities. They must be kept on deposit with the Federal Reserve Bank or held as cash in the bank's vault.

Commercial Bank's Required Reserves / Commercial-Deposit Liabilities

Actual bank or thrift reserves minus legally required reserves. An individual bank can only lend an amount equal to its excess reserves, but the commercial banking system can lend by a multiple of its excess reserves.

The multiple of its excess reserves by which the banking system can expand checkable deposits and thus the money supply by making new loans. m = 1/R

Equal to total excess reserves, E, times the monetary multiplier D = E × m