Functions of Money and Monetary Policy: A Comprehensive Overview

Functions of Money

1. Store of value

2. Medium of exchange

3. Unit of account

Changes in banking laws

Transactions demand to money is closely related to money functioning as medium of exchange

Primary purpose of the legal reserve ratio: provide a means by which the monetary authorities can influence the lending ability of commercial banks.

Money is destroyed when loans are paid off

Securities held as assets by the Federal Reserve Bank consist mainly of Treasury bills and Treasury bonds

What happens when FRB buys bonds from public in open market and amount held by the public doesn't change: Commercial bank reserves will increase

When central bank borrows from FRB, the commercial bank's lending ability is increased.

The simple multiplier 1/mps

Reserve ratio is 10% bank has 5 million of and an actual reserve of 50000 what can it lend out: Cannot safely lend out money

Two basic determinants of investment spending are expected returns (profits) and the interest rate

As the economy declines into recession the collection of personal income tax reserve auto falls this relationship best describes how the progressive tax system serves as an automatic stabilizer for the economy

Federal funds market is the market in which applies to overnight loans of reserves between banks

Monetary policy is thought to be more effective in controlling demand-pull inflation than in moving the economy out of a recession

A firm invests in a machine that costs 5000 expected to produce 5200 a year capital real rate of return: D. Not undertake the investment because the expected rate of return of 4 percent is less than the real rate of interest

The m1 money supply is composed of all the coins and paper money in the hands of the public, and all checkable deposits (all deposits in commercial banks and thrift or savings institutions on which checks of any size can be drawn)

An increase in household wealth that creates a wealth effect is the consumption schedule upward and the saving schedule downward.

The slope of a consumption schedule between two points on the schedule is the ratio of the change in consumption to the change in disposable income between those two parts

Assume that the economy is in the recession there is a budget deficit. A strict balanced budget amendment that became the federal government to balance its budget during a recession would be contractionary and worsen the effects of the recession

An economy is experiencing a high rate of inflation the government wants to reduce consumption by 36 billion: $12 billion

The crowding out effect arises when: Government borrows in the money market, thus increasing interest rates and decreasing net investment spending

Money is created when: takes out a bank loan