ECONFINALSTUDYGUIDE - How is money created? There is...

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How is money created? There is transactions demand, precautionary demand, speculative demand FRACTIONAL RESERVE SYSTEM- every bank must hold reserves (reserve requirement- ensure safety and ability to meet deposit withdrawals)—CREATES new money by giving out loans/investments and the changing reserve requirement, lower the requirement, higher the money multiplier—higher reserve requirement, less money they can loan What is the money multiplier? What are excess and required reserves? Measures max amount of commercial bank money that can be created- amt of loans banks can extend is a multiple of reserves (multiple is reciprocal of reserve ratio) EXCESS RESERVES- bank reserves in excess of reserve requirement set by bank (uneconomical because no interest is earned on excess amount) REQUIRED RESERVES- minimum reserves bank must hold to customer deposits How does Fed affect money supply? (three ways) What do they mainly do, historically to change money supply? 1) change reserve requirement- most powerful tool. .infrequent. .increase in reserve requirement absorbs large changes in excess reserves 2) open market operations- purchase treasury bonds, bills, notes- affect money supply, interest rates 3) discount rate- rate at which depository institution can borrow from the Fed historically, up to 70s, focus on money supply, then Paul Volker focused on interest rates. .70s and 80s, greenspan who raised discount and fed funds rates, lowering inflation…90s, “bubble” for housing and high interest rates Why did Keynes believe fiscal was more effective than monetary policy? In times of depression, economy would act in liquidity trap- no matter how much the money supply increased, rate of interest would fall no lower because business had such low expectations, permanently discouraged investment…also, changing money supply like “pushing on a string” bc of changing consumer and business expectations How is the Fed structured? How are decisions made? What is the Fed’s economic bias? Central banking system in US- independent of gov. 1913. 7 board of governors. Federal open market committee, 12 regional feds, creates currency, also to pursue full employment, price stability, inflation, control money supply…argued too powerful, independent, business oriented. .find interest rates to be important (unlinke monetarists, like Keynes) How does expansionary monetary policy affect economy? It affects the money supply and interest rates, but is tricky because it’s difficult to coordinate with fiscal, and often they cancel each other out How does Keynesian monetary policy differ from Monetarist policy?
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What is the AD? Equilibrium behind it? Relationship between price level and real output-AE in equilibrium= Agg income and the money market in equilibrum- amt of money in economy determined by intersection of money demand and supply curves What causes shift in AD curve, and how? Anything that changes AE can increase and shift AD. Increase in G, I, MS, net exports,
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This note was uploaded on 10/13/2011 for the course ECONOMICS 103 taught by Professor Crocker during the Fall '08 term at UMass (Amherst).

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ECONFINALSTUDYGUIDE - How is money created? There is...

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