Unit 4: Monetary Policy Basics

Uses of Money:

1. Medium of Exchange
2. Unit of Account
3. Store of Value

Types of Money:

1. Commodity money
2. Representative money (IOU’s)
3. Fiat money ($ bc govt says so)

Characteristics of Money:

1. Durability
2. Portability
3. Divisibility
4. Uniformity
5. Scarcity
6. Acceptability

Money Supply:

    M1 Money) cash, coins, currency, traveler’s checks, demand or checkable deposits (largest component)

    M2 Money) M1 Money + savings accounts

    M3 Money) M2 Money + money market accounts + CDs

Liquidity: easy to convert to cash

Balance Sheet: summarizes finance decision of a bank at a certain time

Liabilities = Assets

Liabilities (owe): RR and ER;

Assets (own): DD; net worth or owner’s equity

Required Reserve + Excess Reserve = Demand Deposit

RR: Bank holds a fraction of deposit back as reserve in bank

ER: Held by a bank or financial institution in excess of what is required by regulators, creditors or internal controls

Open Market Operations: Buy or sell bonds; Fed can buy or sell bonds from public of banks; if Fed sells bonds, Fed gets cash and removes from money supply ; if Fed buys bonds, nation gets cash therefore increasing money supply

Discount Rate: FDIC member banks and other eligible institutions; borrow short term loans directly from Fed

Federal Fund Rate: FDIC member banks loan eachother money overnight; borrow from other banks

Prime Rate: Interest rate that banks charge out of most well known customer