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1 Chapter 3 The Role of Money and Credit © 2000 South-Western College Publishing
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2 Interest Rate The cost to borrowers of obtaining money and the return (or yield) on money to lenders
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3 Quantity Demanded of Money The specific amount of money that spending units wish to hold at a specific interest rate (price)
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4 Demand for Money The entire set of interest rate- quantity demanded combinations as represented by a downward-sloping demand curve for money
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5 Supply of Money The stock of money (MI) which includes currency in the hands of the public plus checkable deposits
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6 Depository Institutions Financial intermediaries such as commercial banks, savings and loans, credit unions, and mutual banks that issue checkable deposits
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7 Reserves Assets that are held as either vault cash or reserve deposit accounts with the Fed
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8 Required Reserve Ratio The fraction of deposit liabilities that depository institutions must hold as reserve assets
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9 Interest Rate (Percent) Quantity of Money Demand Exhibit 3-1 The Demand for Money
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10 Quantity Supplied of Money The specific amount of money that will be supplied at a specific interest rate
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11 Interest Rate (Percent) Quantity of Money Supply Exhibit 3-2 The Supply of Money
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12 Interest Rate (Percent) Quantity of Money Supply Exhibit 3-3 Demand ieie Market Equilibrium
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13 Interest Rate (Percent) Quantity of Money SS Exhibit 3-4 Demand ieie S i1ei1e Increase in the Money Supply
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14 Federal Reserve Acts Interest Rates, Money Supply and Credit Flows Change Aggregate Demand for Goods and Services Shifts Economy’s Output and Prices Respond Exhibit 3-5
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15 Credit is... The flow of money from SSUs or financial intermediaries to DSUs in a given time period, and vice versa
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16 Real Gross Domestic Product (Real GDP) The real, or inflation-adjusted quantity of final goods and services produced in an economy in a given time period
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17 Consumer Price Index (CPI) A price index that measures the cost of a market basket that a typical urban consumer purchases
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18 Producer Price Index (PPI) A price index that measures the change in the cost of a market basket purchased by the typical producer of goods and services
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19 Inflation Rate The rate of change in the consumer price index that measures the growth rate of the average level of prices paid by consumers
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20 Nominal GDP The quantity of final goods and services produced in an economy during a given time period and valued at today’s prices
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21 1982-84 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 $500 620 653.50 681 701.50 722.50 741 762 784.50 802.50 815 100 124 130.7 136.2 140.3 144.5 148.2 152.4 156.9 160.5 163 5.4% 4.2 2.6 3.0 2.6 2.8 3.0 2.3 1.6 Year Total Cost of Market Basket Consumer Price Index Annual Inflation Rate Measuring the Inflation Rate
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22 Monetarists Economists who stress the role of money in determining the overall health of the economy
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