Chapter 25 - Money

Chapter 25 - Money - Federal reserve bank regulates the...

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25 CHAPTER MONEY
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Measures of money M0 : Total of all currency plus accounts at the central bank which can be exchanged for currency. Narrowest measure M1 : Is M0 plus the amount in checking accounts. M2 : Is M1 plus savings accounts, money market accounts, and CDs (under 100K). Broader measure
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Opportunity cost of money What is the opportunity cost of holding money (in the most liquid form – currency)?
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Growth of money measure M1
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Growth of money measure M2
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Depository Institutions Depository institution: Accepts deposits from households and firms and makes loans to other households and firms. Commercial banks Thrift institutions Money market mutual funds
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Federal Reserve Bank The Federal Reserve System , or the Fed, is the central bank of the United States. A central bank regulates the nation’s depository institutions and controls the quantity of money.
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Creating Money Required reserve ratio: the fraction of deposits that banks are required to keep as reserves.
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Unformatted text preview: Federal reserve bank regulates the ratio. Institutions may hold greater reserves. Excess reserves equal actual reserves minus required reserves. Short-run: Money, Real GDP, Prices Increase in money. AD shifts right. Real GDP increases. Price level rises. Long-run: Money, Real GDP, Prices Initially, prices rise. Subsequently, upward pressure on wages. SAS shifts left. Long-run effect: real GDP unchanged but prices increase inflation. Long-run: Money, Real GDP, Prices Figure Summary: Money, Real GDP, Prices Short-run: increase in money increases real GDP and prices. Long-run: increase in money increases prices with NO change in real GDP. A Key Prediction: Money growth and inflation should be correlated. Evidence: Money and Prices Source: ttp://www.nowandfutures.com/key_stats.html#money_cpi International Evidence Money and Prices Across countries: High money growth associated with high inflation rates....
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Chapter 25 - Money - Federal reserve bank regulates the...

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