Ch 13-15 Test Review

• M1
• Currency
• Coins
• Checkable Deposits (largest)
• Fed Fund rate
• The interest rate that banks charge each other on overnight loans
• Prime Rate
• The interest rate that banks charge their best customers
• Discount Rate
• The interest rate that the fed charges the banks for loans
• Monetary Tools in order of usage
• Open Market Operations
• Discount rate
• Reserve Ratio
• Monetary tools to fight a recession
• Loose money policy
• Buy securities
• Lower Discount Rate
• Lower Reserve Requirement
• Monetary tools to fight inflation
• Tight money policy
• Sell securities
• Raise the discount rate
• Raise the reserve requirement
• Effect of loose monetary policy on Sm, Reserves(excess), Interest
Rates and Real Output
• Increase Sm
• Increases Excess reserves
• Lowers interest rate
• Increases Ig (due to interest sensitivity), Increases real output
• Effect of tight monetary policy on Sm, Excess Reserves, Interest
Rates and Real Output
• Decreases Sm
• Decreases the excess reserves
• Raises the Interest rate
• Decreases Ig (due to interest sensitivity), decreases real output
• Money Multiplier
• M= 1/R
• Required Reserves
• RR= Deposit • Reserve Ratio
• Excess Reserves
• ER = Deposit - Require Reserves
• Money Expansion
• Expansion = Excess Reserves • Money Multiplier
 Ch 13-15 Test Review

• Leakages of Money Expansion

• Currency Drain
• People may keep some of the deposit and my not deposit the whole amount
• Banks may not lend all of their excess
• Neutrality of Money
• Fed increases Sm, Increases AD (Increases output and price level). When
the price level goes up, people want higher wages, which will shift the AS
curve to the left, which will bring the economy back to full employment, but
will have an increase of price level.
• Increases in Sm in the long run will only increase the price level
• MV=PQ
• M = Sm
• PQ = nominal GDP
• Net worth
• Net Worth = Assets - liabilities
• T-Account
• Deposits are on the liability side
• Loans and reserves are on the assets side
• Policy Mix (just graph it all out)
• Both Expansionary Policy (graph it out)
• Interest rate will be indeterminate
• GDP and PL will Increase
• Both Contractionary Policy (graph it out)
• Interest rate will be indeterminate
• GDP and PL will decrease
• Tight monetary policy with expansionary fiscal policy
• Interest rates will increase
• Price level and GDP will increase