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Chapter 3 - Chapter 3 The Fed and Interest Rates Federal...

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Chapter 3 The Fed and Interest Rates I. Federal Reserve Control of the Money Supply 1. Measures of the Money Supply A. M1 = Currency + Checking Deposits . (Focuses on money as a medium of exchange) B. M2 = M1 + Saving Deposits , Money Market Deposit , Overnight Repurchase Agreements , Eurodollars , Noninstitutional Money Market Mutual Fund , and Small Time Deposit . (Emphasizes the role money plays as store of value) C. MZM = M2 Small Denomination Time Deposits + Institutional Money Market Mutual Funds . (Includes all financial assets that can be converted into cash immediately) D. Divisa Money = weights various types of financial assets according to their degree of liquidity and sum them up. 2. Monetary Base and Money Supply Changes A. Fed influences the money supply by either monetary base or reserve requirement . B. Monetary Base = Currency + Deposits of Financial Institutions at the Fed . C. Total Reserve = Required Reserved + Excess Reserves . (TR=RR+ER) Because the financial institutions do not earn any interest on excess reserves , they would try to make additional loans or buying investment security.
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