Macroeconomics – Unit 4

take out your notes from previous class to make sure you have Financial Assets Individuals can hold wealth in forms that (1) work their way back into circular flow such as ___________, __________, & __________ (2) presumed to escape the circular flow ___________. bonds stocks money loans 2 0f 11

Money is highly liquid meaning that it is.. Which of these is easily changeable? easily changeable into another asset or good

Money serves 3 functions (1) generally accepted as a medium of exchange (2) used as a reference in valuing other goods (3) can be stored as wealth = = 1 5

Kinds of Money (1) Commodity Money – item used as money that would have an __________ __________ even if not used as money (2) Fiat Money – item used as money b/c it was _________ as money by some ______________. intrinsic value government declared 5 0f 11

Money is defined as.... M1M1 M2M2 (on hand) M1M1 savings acct small- denomination time deposits money market mutual funds = =

M2M2 M1M1 savings acct small- denomination time deposits money market mutual funds = M 1 makes up what percentage of M 2 21% What is largest component of M 2 ? savings deposit comprise 48%

related to the idea of creation of money in the economy is the....Quantity Theory of Money..... which has an equation of exchange that attempts to show the relationship between money supply, price & real output. M V P Q We learned that the 2 variables ____ & ____ tend to remain constant. So an increase in M (money supply) tends to cause an increase in ____ also referred to as _____________. ____ ____ = ____ ____ inflation P Q V 8 0f 11

So… reserves = ______ ______ + _______ ________ Required reserves At the bank…. ___________ = all the money a bank has __________ _________ = the money a bank has that it is required to hold in its vault __________ _________ = the money a bank has that it is free to loan out Reserves Required reserves Excess reserves

Banks have ________ ______________ set forth by the Fed that mean they must keep a certain percentage of all deposits on hand or deposited at the Fed. reserverequirements Banks actually __________ money by loaning out their _________ _________. create excessreserves simple money multiplier = __1__ r

If you have an initial deposit of $5,000 in a bank and the reserve requirement is 25%, what amount of money will be created?.25 4 simple money multiplier = __1__ r __1__ ___ == $5,000 x 4 = ________ minus ________ because that money already existed. $20,000 $5,000 New money created = ________ $15, f 11