CAS EC 102 Lecture Notes - Lecture 15: Discount Window, Aggregate Demand, Open Market Operation

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What is money vs what money is. Liquidity - how we distinguish between the two. How easy is it to use an asset as a medium of exchange. Spectrum from the most liquid (easiest to use) to least liquid (hardest to use. M1 (most liquid on spectrum) narrow def more on liquidity. As of aug 2017, mi = . 6trillion. M2 (broader def of the money supply) Barterin(cid:322) doesn"t (cid:476)ork (cid:282)e(cid:283)ause o(cid:321) a dou(cid:282)le (cid:283)ons(cid:283)iousness o(cid:321) (cid:476)ant hard to find the exact person who has what i want who has exactly what i want. Difficult on a large scale for every single good. Checks are not money, but checking deposits are. Essential activity - take deposits and make loans. Basics of bank accounting - balance sheets. Bank capital - what the bank is worth (net worth) (=a-l) Interest - bigger in the beginning because there is a big amount remaining. Customer makes a payment of ( interest + principal)

Related Questions

With explanations and work please!

Suppose the Federal Reserve buys 100 of mortgage-backed securities in the open market. What effect will this open market operation have on demand deposits and M1? Show all work.

Assume the required reserve ratio is 10% and the currency drain is 40%. Ignore all other complications. Thanks!

M1:

What is 'M1'

M1 is a metric for the money supply of a country and includes physical money â both paper and coin â as well as checking accounts, demand deposits and negotiable order of withdrawal (NOW) accounts. The most liquid portions of the money supply are measured by M1 because it contains currency and assets that can be converted to cash quickly. "Near money" and "near, near money," which fall under M2 and M3, cannot be converted to currency as quickly.

M1= Currency + Demand Deposits

1) Assets can be classified in 3 ways according to its liquidity. However, such assets do not include homes, jewelry, vehicles, etc. Why? (use three sentences maximum)

2) People often like to visit flea markets to look for unexpected opportunities. Flea markets also typically use cash. Explain why this is an example of the liquidity demand for money.

3) What would happen to the supply of money if a central bank purchased long-term government bonds held by the public?

4) If investors began to think the stock market is becoming less risky, how will this belief affect the demand for money? Would this more likely affect M1 or M2?

5) Suppose the interest rate on a two-year bond was higher than the interest rate on a one-year bond. What does the market believe will happen next year to one-year interest rates?

Question 1. Which of the following is not included in M1?
a- currency
b- demand deposits
c- traveller's checks
d- credit cards

Question 2. When the Fed purchases $200 worth of government bonds from the public, the U.S. money supply eventually increases by

a- more than $200.
b- exactly $200.
c- less than $200.
d- None of the above are correct.

Question 3. Savings deposits are included in

a- M1 but not M2.
b- M2 but not M1.
c- M1 and M2.
d- neither M1 nor M2.

Question 4. Credit cards

a- defer payments.
b- are a store of value.
c- have led to wider use of currency.
d- are part of the money supply.

Question 5. Table 16-3.
The First Bank of Fairfield

Assets	Liabilities
Reserves $2,000	Deposits $10,000
Loans 8,000

Refer to Table 16-3. The reserve ratio for this bank is

a- 0 per cent.
b- 20 percent.
c- 80 per cent.
d- 100 per cent.

Question 6. If an economy uses silver as money, then that economy's money

a- serves as a store of value but not as a medium of exchange.
b- serves as a medium of exchange but not as a unit of account.
c- is commodity money.
d- has no intrinsic value.

Question 7. In the United States, currency holdings per person average about

a- $125; one explanation for this relatively small average is that many people use credit and debit cards to make transactions.
b- $125; one explanation for this relatively small average is that U.S. citizens hold a lot of foreign currency.
c- $3,700; one explanation for this relatively large amount is that criminals probably prefer currency as a medium of exchange.
d- $3,700; one explanation for this relatively large average is that U.S. citizens hold a lot of foreign currency.

Question. 8. Money is the most liquid asset available because

a- it is a store of value.
b- it is a medium of exchange.
c- it is a unit of account.
d- it has intrinsic value.

Question 9. All Fed purchases and sales of

a- corporate stocks and bonds are conducted at the New York Fed's trading desk.
b- government bonds are conducted at the New York Fed's trading desk.
c- real estate and other real assets are conducted by the Federal Open Market Committee.
d- All of the above are correct.

Question 10. The Fed's policy decisions have an important influence on

a- inflation in the long run and employment and production in the short run.
b- inflation in the long run and employment and production in the long run.
c- inflation in the short run and employment and production in the short run.
d- inflation in the short run and employment and production in the long run.

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CAS EC 102 Lecture Notes - Lecture 15: Discount Window, Aggregate Demand, Open Market Operation

CAS EC 102 Full Course Notes

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