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Definitions and concepts related to money, the role of the federal reserve, and the demand for money. Topics include the difference between money, income, and wealth, the function of money market funds, and the lm relation. Students will gain a foundational understanding of monetary economics.
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TERM 1
DEFINITION 1 The central bank of the United States.Chairman: Ben Bernanke TERM 2
DEFINITION 2 Can be used for transactions and pays no interest.Types of Money: Currency : Coins and bills Checkable Deposits : Bank deposits on which you can write Currency + Checkable Deposits = M TERM 3
DEFINITION 3 Pay a positive interest rate (i) , cannot be used for transactions. i = rate of interest TERM 4
DEFINITION 4 Money: What can be readily used to pay for transactions.Income: What you earn from working plus what you receive in interest and dividends. Income is a flow, meaning expressed in units of time. Wealth: Value of your total financial assets minus total financial liabilities. Wealth is a stock variable, a snapshot of a particular moment. TERM 5
DEFINITION 5 Money market funds pool together the funds of many people and purchase bonds.Typically hold government bonds.Pay interest slightly below the underlying bonds b/c of admin costs.Considered a type of Mutual Fund.
TERM 6
DEFINITION 6 (In the economy as a whole)The sum of all of the individual demands for money by an economy.Demand for money increases in proportion to nominal income.M^d = $Y L(i)Y: Nominal IncomeL(i): a function of interest rate (i), interest rate has a negative effect on money demand. TERM 7
DEFINITION 7 The interest rate (i) must be such that, given their income ($Y), people are willing to hold an amount of money equal to the existing money supply (M). "L" in relation is "Liquidity".Financial Market Equilibrium Condition: Money Supply = Money Demand M = $Y L(i)