DSST Money & Banking Part 1

Certificates of deposit of under 100000 m3 m2 all

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certificates of deposit   of under $100,000).  M3 : M2 + all other  CDs  (large time deposits, institutional money market mutual fund balances), deposits of  eurodollars   and  repurchase agreements Monetary exchange equation (Equation of Exchange):   Money supply is important because it is linked to  inflation  by  the  equation of exchange M x V = P x Q  • M is the total dollars in the nation’s money supply • V is the number of times per year each dollar is spent • P is the  average price of all the goods and services sold during the year • Q is the quantity of assets, goods and services sold  during the year, where: Velocity  = the number of times per year that money turns over in transactions for goods and services (if it is a number it is  always simply nominal GDP / money supply – may also be expressed as V = PXQ / M since Price X Quantity equals  GDP.) Nominal GDP  = real  Gross Domestic Product   ×  GDP deflator  GDP deflator  = measure of inflation.  liquidity trap  is a situation in  monetary economics  in which a country's  nominal   interest rate  has been lowered nearly or  equal to zero to avoid a  recession , but the liquidity in the market created by these low interest rates does not stimulate the  economy. In these situations, borrowers prefer to keep assets in short-term cash bank accounts rather than making long- term investments. This makes a  recession  even more severe, and can contribute to  deflation . [1] In normal times, the monetary authority (usually a  central bank  or finance ministry) can stimulate the economy by lowering  interest rate targets or increasing the  monetary base . These actions are meant to increase borrowing and lending,  consumption, and fixed  investment . When the relevant interest rate is already at or near zero, lowering it to a level which  would stimulate the economy may not be possible. The monetary authority can increase the overall quantity of money 
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available to the economy, but traditional monetary policy tools do not inject new money directly into the economy. Rather,  the new liquidity created must be injected into the real economy by way of  financial intermediaries  such as banks. In a  liquidity trap, banks are unwilling to lend, so the central bank's newly-created liquidity is trapped behind unwilling lenders. The liquidity trap theory applies to  monetary policy  in non-inflationary depressions. The theory does not apply to  fiscal   policies  that may be able to stimulate the economy. [ citation 
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