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Money, Banking, and Monetary Policy Cheat Sheet by

Different types of financial assets

something used to facilitate the exchange of goods and services
shares in the ownership of a business
a certif­icate of debt issued by a business or a government
money is measured in liquidity. M1 is the highest liquidity (coins, cash, cd)
open market operations
fiat money: something that serves as money but has no other important uses

Monetary Policy

1. Change the required reserve ratio
2. Change the discount rate
3. Change the federal funds rate
4. Open-m­arket purchase of government bonds by the central bank

Fiscal Policy

Government Spending
Income Taxes
Increase in gov. spending leads to more income = more consum­ption
Tax reductions lead to more consum­ption.
More consum­ption leads to more invest­ments by firms.
Firms can produce more, which leads to greater invest­ments.
- examples above are expans­ionary fiscal policy
- the opposite (raise taxes + lower gov spending) is contra­cti­onary fiscal policy
- these things shift aggregate demand

Federal Reserve Board (Board of Governors)

-indep­endent regulatory agency
-#1 Goal: control the money supply
there are 7 board members who all serve 14 year terms
-US central bank
-also, to stabilize the banking system
they are chosen by the president
-created by the Federal Reserve Act of 1913
The Federal Open Market Committee aids the Board of Governors in conducting Monetary Policy .
buying and selling bonds

AD + AS Graph

P0 shows the market in equili­brium. P2 shows a shift in AD, creating a recess­ionary gap.

Shifters of AD + AS

Aggregate Demand
Aggregate Supply
Inflati­onary expect­ations
Resource prices
Government spending
Actions of the government
Xports (net)

Money Supply

What does the money supply mean?
The money supply is the money in the economy at M1.
In a money market graph, why is the Money Supply curve vertical?
Money supply is indepe­ndent of interest rates because it is determined by monetary policy actions of the Fed
What are the shifters of money supply?
1. setting reserve requir­ements, 2. setting federal funds rate, 3. setting discount rates, 4. open market operations

How do banks create money?

After banks receive deposits from their customers, they put away enough to meet required reserves.
The rest of the money in their excess reserves, they can loan out.
That loan gets spent in the economy.
This means they created money because they have the same money in one person's savings that they loaned out, and that went into the economy.
Required reserves is the percentage of a deposit a bank is required to keep (cannot be loaned out).

Money Market Graph

Money Demand

Why is money demanded in an economy?
1. to perserve wealth in liquid form and 2. to use in transa­ctions the market
What does the demand curve look like?
Lower interest rates lead to a higher demand for money. The curve is downward sloping.
What are the shifters of money demand?
1. Technology, 2. Real GDP, 3. Institu­tions, 4. Price Level (TRIP)

Shifters of Money Supply (extended)

The Discount Rate
Rate the Fed charges banks to take out overnight loans from them.
Federal Funds Rate
Rate banks charge other banks to take out overnight loans
Open Market Operations
The Fed buying and selling bonds
Big Money=Buy; Small Money=Sell

Formulas to Know

Quantity Theory of Money
Money Multiplier
Quantity theory of money shows that the money supply (M) will affect the price level (P) and/or the real output if the velocity of money (V) is fixed in the short run.

Phillip's Curve

shows inverse relati­onship between inflation and unempl­oyment
if you want to lower inflation, unempl­oyment will rise


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