Money, Monetary Policy

1. How does The Fed Use Money to Stabilize Economies? Monetary Policy Money, Measures, Time Value, Creation

2. What is SCRILLA? (Money) Medium of Exchange Can trade with it Unit of Account (Value) Shows worth Store of Value Maintains value

3. 3 types of $ are included in the Money Supply, the FED Controls M1 and M2 MONEY SUPPLY

4. Types of Cash Stacks: M1 M1 Currencies and Coins Demand Deposits  Traveler’s Checks and Checking Accounts

5. TYPES OF CASH STACKS: M2 M2 STORE OF VALUE Less Liquid… (slower to convert to cash) M1 + Savings Deposits Time deposits Money Market Deposits Mutual Funds

6. TYPES OF CASH STACKS: m3 M3 The least liquid M2 +… Large Time Deposits (over $100,000)

7. TIME VALUE OF MONEY Value falls with INFLATION Interest Rates equate dollars today with dollars in the FUTURE

8. HOW DOES THE FED USE THE MONEY SUPPLY TO PREDICT GDP? MV = PQ PQ = Nominal GDP M = Money Supply (M1 or M2) V = Money’s Velocity (# of times Dollars is Spent) P = PL (AS/AD) Q = Real GDP MONETARY EQUATION OF EXCHANGE

9. The Money Market R = Nominal Interest Rate R MS R MD QM Q

10. CREATE THE NEW CURRENCY DESIGN FOR A DEVELOPING COUNTRY THAT INCLUDES:

12. THE FED: Central Bank HOW CAN THE FED USE THE MONEY SUPPLY TO ACHIEVE FULL EMPLOYMENT AND PRICE STABILITY?

13. Tools Of Monetary Policy % of $ that must be stored Determines the multiplier (1/required reserves) Usually 10% or .1 Interest banks pay the Fed for loans Decrease = banks borrow more Increase = banks borrow less Reserve Ratio = RR Discount Rate

14. Tools of Monetary Policy Interest Rate banks pay each other for loans Buy Bonds: “Bigger Bucks” Increase MS Sell Bonds: “Smaller Bucks” Decrease MS Federal Funds Rate Open Market Operations: Treasury Bonds ** ** = most frequently used Tool

15. Types of Monetary Policy Contractionary “Tight Money” Expansionary “Easy Money”

16. Increase MS ($$) Expansionary Monetary Policy R MS MS1  R   R1 MD QM Q Q1

17. DECREASE MS (-$$) Contractionary Monetary Policy R MS MS1  R1   R MD QM Q Q1

18. Expansionary Fed buys bonds, lowers Federal Funds, Reserve Requirements, Discount Rate  “Bigger” Bucks Increase MS R↓ IG↑ ↑ AD

19. EXPANSIONARY MS MS1 R R  R R    i1 i1 ID MD  QM Q Q1 IG I I1 LRAS PL SRAS  P1  P AD1 AD  GDPR YF Y

20. Contractionary Fed sells bonds, raises Federal Funds, Reserve Requirements, and Discount Rate  “Smaller” Bucks Decrease MS R ↑ IG ↓ ↓ AD

21. Currency: BACK