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Macroeconomics Chp 11
The Financial Sector and the Demand for Money
18
Economics
Undergraduate 2
11/10/2008

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Term
Commercial banks create money by
Definition
making loans
Term
As the reserve ratio increases, a given of deposits will support
Definition
fewer loans
Term
If the cash-to-deposit ratio is 0.25 and the reserve ratio is 0.25, then the amount of money created per dollar deposited in the banking system is
Definition
$2.50
Term
Holding money for the transactions motive implies the need to hold money for
Definition
spending
Term
In the money market the supply curve is
Definition
 vertical
Term
The financial sector is important to Macro
Definition
[image]      Channels savings back into the circular flow[image]      For every asset, there is a corresponding liability
Term
Money serves as a unit of
Definition
o   a medium of exchangeo   a unit of accounto   a store of wealth
Term
M1
Definition
o   Currency (50%)o   Checking Accounts (45%)o   Traveler’s Checks (1%)
Term
M2
Definition
o   M1o   Money Market Mutual Funds (15%)o   Savings Deposits (51%)o   Small-Denomination time deposits (15%)
Term
The Federal Reserve Bank (the FED) is the
Definition
U.S. central bank
Term
Federal Reserve notes are
Definition
liabilities of the FED that serve as cash in the U.S.
Term
Equation for the reserve ratio
Definition
[image]      Reserve ratio= required + excess
Term

Definition of reserves

Definition
cash & deposits a bank keeps on hand or at the Fed
Term
TOTAL AMOUNT OF DEPOSITS THAT WILL BE CREATED
Definition
  Original deposit * (1/r)
Term
People hold money because of
Definition
[image]      The precautionary motive[image]      The transaction motive[image]      The speculative motive
Term
financial sector expands the spending flow too much
Definition
you get inflationary pressures
Term
If the financial sector contracts the spending flow too much
Definition
you get a recession
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