Macroecnmoics

• Economic systems can be centrally planned (government-controlled) or free market (individuals decide), with mixed economies having elements of both
• In a free market economy, the concept of the invisible hand guides resources to meet society's needs based on individual self-interest and competition
• Financial Sector- Network of institutions thatlink borrowers and lenders including banks,mutual funds, pension funds, and otherfinancial intermediaries
• Assets- Anything tangible or intangible that isowned
• Liability- Anything that is owed
• Loan- An agreement between a lender and aborrow. Usually at a fee called the interest rate.
• Liquidity - ease with which an asset can beaccessed and used as a medium of exchange
• 1. M1 (Highest Liquidity) –Currency in circulation2. Checkable bank deposits (checking accounts)3. Traveler’s checks
• 1. M2 (Near-Moneys) - M1 plus the following:Savings deposits (money market accounts)2. Time deposits (CDs = certificates of deposit)3. Money market funds
• 1. A Medium of Exchange• Money can easily be used to buy goods andservices with no complications of bartersystem.
• 2. A Unit of Account• Money measures the value of all goods andservices. Money acts as a measurement ofvalue.
• 3. A Store of Value• Money allows you to store purchasing powerfor the future.
• Money is anything that is generally accepted inpayment for goods and servicesMoney is NOT the same as wealth or income
• Commodity Money- Something that performs thefunction of money and has intrinsic value.
• Fiat Money- Something that serves as money buthas no other value or uses.
• Transaction Demand for Money- People holdmoney for everyday transactions.
• Asset Demand for Money - People hold moneysince it is less risky than other assets
• What happens to the quantity demanded ofmoney when interest rates increase?Quantity demanded falls because individualswould prefer to have interest earning assets instead
• What happens to the quantity demanded wheninterest rates decrease?Quantity demanded increases. There is no incentiveto convert cash into interest earning assets
• The demand curve for money slopes downwards fromleft to right, indicating an inverse relationshipbetween interest rate and the quantitydemanded.
• Inflation is defined as the general rise in pricesof goods and services over time.
• Deflation is the opposite of inflation where thereis a fall in the price level of goods andservices over time.
• M1 = Coins + Currency + Traveler's Checks+ Demand Deposits
• M2 = M1 + Savings Accounts + Small DenominationTime Deposit Certificates (CDs)
• Hyperinflation occurs when the rate of inflationbecomes extremely high (over 50% per year).
• Hyperinflation occurs when the rate of inflationbecomes extremely high (over 50% per year)
• M3 = M2 + Large Time Deposit Certificates(CDs) + Retail Money Market Mutual Funds
• Disinflation refers to a slowing down or deceleratingrate of inflation.
• Disinflation refers to a slowing down ordecreasein the rate of inflation.
• M2 = M1 + Savings Accounts + Small TimeDeposit Accounts (less than $100,000)
• Stagflation is a combination of stagnant economicgrowth with rising unemployment andinflation.
• M3 = M2 + Large Time Deposit Accounts(more than $100,000) + Money MarketAccounts
• M3 = M2 + Large Denomination TimeDeposit Certificates (CDs) + Money MarketAccounts
• Stagflation is characterized by rising unemployment,slowing economic growth, and increasingprices.
• The money supply refers to the total amount ofmoney available within an economy at any given time.
• 1. Money Demand ShiftersChanges in price level2. Changes in income3. Changes in technology
• What graph is this?

  Money Market Curve

  
• What happens when you decrease the money supplied?

  Increase in Money Supply --> Decrease interest Rates --> increases investments --> Aggregate Demand
• What happens when you decrease the Money Supply?

  Decrease Money Supply --> Increase in Intrest Rates --> Decrease in Investment --> Decrease AD
• The reserve requirement (reserve ratio) isthe percent of deposits that banks must hold inreserve (the percent they can NOT loan out)