1 Chapter 3 The Role of Money and Credit © 2000 South-Western College Publishing

2 Interest Rate The cost to borrowers of obtaining money and the return (or yield) on money to lenders

3 Quantity Demanded of Money The specific amount of money that spending units wish to hold at a specific interest rate (price)

4 Demand for Money The entire set of interest rate- quantity demanded combinations as represented by a downward-sloping demand curve for money

5 Supply of Money The stock of money (MI) which includes currency in the hands of the public plus checkable deposits

6 Depository Institutions Financial intermediaries such as commercial banks, savings and loans, credit unions, and mutual banks that issue checkable deposits

7 Reserves Assets that are held as either vault cash or reserve deposit accounts with the Fed

8 Required Reserve Ratio The fraction of deposit liabilities that depository institutions must hold as reserve assets

9 Interest Rate (Percent) Quantity of Money Demand Exhibit 3-1 The Demand for Money

10 Quantity Supplied of Money The specific amount of money that will be supplied at a specific interest rate

11 Interest Rate (Percent) Quantity of Money Supply Exhibit 3-2 The Supply of Money

12 Interest Rate (Percent) Quantity of Money Supply Exhibit 3-3 Demand ieie Market Equilibrium

13 Interest Rate (Percent) Quantity of Money SS Exhibit 3-4 Demand ieie S i1ei1e Increase in the Money Supply

14 Federal Reserve Acts Interest Rates, Money Supply and Credit Flows Change Aggregate Demand for Goods and Services Shifts Economy’s Output and Prices Respond Exhibit 3-5

15 Credit is... The flow of money from SSUs or financial intermediaries to DSUs in a given time period, and vice versa

16 Real Gross Domestic Product (Real GDP) The real, or inflation-adjusted quantity of final goods and services produced in an economy in a given time period

17 Consumer Price Index (CPI) A price index that measures the cost of a market basket that a typical urban consumer purchases

18 Producer Price Index (PPI) A price index that measures the change in the cost of a market basket purchased by the typical producer of goods and services

19 Inflation Rate The rate of change in the consumer price index that measures the growth rate of the average level of prices paid by consumers

20 Nominal GDP The quantity of final goods and services produced in an economy during a given time period and valued at today’s prices

$ % Year Total Cost of Market Basket Consumer Price Index Annual Inflation Rate Measuring the Inflation Rate

22 Monetarists Economists who stress the role of money in determining the overall health of the economy