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MSU - ECON 2113 - Principles of Macroeconomics: Final Exam Study Guide

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MSU - ECON 2113 - Principles of Macroeconomics: Final Exam Study Guide

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background image Principles of Macroeconomics Final Exam Study Guide 11/7/16 Chapter 14 Function of Money ● Medium of exchange  ○ Usable for buying and selling goods and services ● Unit of account ○ Measuring the relative worth of a wide variety of goods, services, and  resources ● Store of value ○ Transfer purchasing power from present to future  ○ People can choose to hold some or all of their wealth in a wide variety of assets besides money. Money Definition, M1 ● M1 ○ Currency (coins and paper money) in the hands of the public
○ Checkable deposits (all deposits in commercial banks and “thrift” or 
savings institutions on which checks of any size can be drawn) ● Institutions that offer checkable deposits ○ Commercial banks are the primary depositary institution ○ Savings and loan associations  [accept the deposits of households and businesses and then                                                       use the funds to finance housing mortgages]  ○ Mutual savings bank ○ Credit unions (accept deposits from and lend to “member”, who usually  are a group of people who work for the same company) Money Definition, M2 ● M2 ○ Near­Monies are certain highly liquid financial assets that do not  function directly or fully as a medium of excahnge but can be readily converted into 
currency or checkable deposits.
○ Savings deposits including money market deposit accounts(MMDA)  ■ An interest­bearing account containing a variety of  interest­bearing short­term securities.) ○ Small­denominated time deposits ■ Funds from time deposits become available at their  maturity. ○ Money market mutual funds(MMMF) ■ Use the combined funds of individual shareholders buy  interest­bearing short­term credit intruments
background image What “Backs” the money supply? ● Guaranteed by government’s ability to keep value stable  ● Money as debt ○ Paper money and checkable deposits ● Why is money valuable? ○ Acceptability  ■ currency and checkable deposits are money because  people accept them as money. ○ Legal tender  ■ Paper money is a valid and legal menas of payment of  any debt that was contracted in dollars. ○ Relative scarcity ■ Money derives its value from its scarcity relative to its  ( its want­satisfying power.) ● Prices affect purchasing power of money ○ Higher prices lower the value of the dollar ● Hyperinflation renders money unacceptable ○ When the government issued so many pieces of paper currency that the  purchasing power of each of those units of money was almost totally undermined ● Stabilizing money’s purchasing power ○ Intelligent management of money supply­monetary policy Federal Reserve­Banking System ● 12 Federal Reserve Banks ○ Blend private and public control, collectively serve as the nation’s  “central bank” ○ Blend private ownership and public control as Quasi­public banks ○ Banker’s bank perform the same functions for banks and thrifts as those  institutions perform for the public. Federal Reserve Functions ● Issue Currency ○ Federal Reserve Notes, the U.S monetary system ● Set reserve requirements ○ Fraction of checking account valances that bank must maintain as  currency reserves ● Lend money to banks ○ Fed makes short­term loan to banks and thrifts and charges them as  interest rates called discount rate ● Collect checks ● Act as a fiscal agent for U.S. government ○ The government collects huge sums of taxation, spends equally large  amounts, and sells, and redeems bonds ● Supervise banks 
● Control the money supply
background image ○ The fed has ultimate responsibility for regulating the supply of money  and this enable it to influence interest rates. Federal Reserve Independence ● Established by congress as an independent agency
● Protects the Fed from political pressure
● Enables the Fed to take actions to increase interest rates in order to stem inflation as  needed Chapter 15 Fractional Reserve System ● The Goldsmiths ○ Traders deposited their gold to goldsmiths who would store it in vaults  for a fee. The goldsmith would issue a receipt to the depositor. ○ Soon they started paying for goods with the receipts, which served as the  first type of paper money ○ Goldsmiths made loans by issuing receipts ● Characteristics: ○ Banks create money through lending ○ Banks are subject to “panics” ● Balance sheet  ○ A statement of assets and claims on those assets
○ Assets= liabilities + net worth
■ Liabilities: claims of non owners of the bank against  firm’s assets ■ Net worth: claims of the owners of the firm against the  firm’s assets ● Necessary transactions ○ Create a bank ○ Accept deposits
○ Lend excess reserves

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School: Mississippi State University
Department: Economics
Course: Principles of Macroeconomics
Professor: Heriberto Gonzalez
Term: Fall 2016
Tags: Macroeconomics
Name: Principles of Macroeconomics: Final Exam Study Guide
Description: Finals are coming up! This Study guide covers chapters 14-16 for the final exam!
Uploaded: 12/02/2016
11 Pages 104 Views 83 Unlocks
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