The Components of Money Supply

The Components of Money Supply

12. What are the components of the money supply?
Liquid assets
13. Identify and define two types of money.
Commodity –based on some item of value.
Fiat money-many that is deemed legal tender by the government.
14. List four measures of the money supply and describe them.
M1-money that can be spent immediately
M2- M1 plus short term investments.
M3- M1, M2 and large deposits
MZM- money at zero maturity

15. List and define three types of banks reserves.
Primary reserve – consist of cash on hand, deposits that may be due from other banks, and the percentage required by the federal reserve system.
Secondary reserve – Are the securities the bank purchases from the federal government.
Excessive reserve- are the resources a bank uses to create money through its business transactions
16. How does the multiplier effect create new deposits?
It creates more deposit which also go out to customers as loans and creates more deposits thus expanding the money in the system.
17. Why might the Federal Reserve notes be thought of as IOU’s
It is a liability in the Federal Reserve books

18. What actually backs up the currency of the United States?
The government
19. What is the difference between the discount rates and prime rate?
Discount rate is the interest rate that the Federal reserve set and charges for loan member banks. Prime rate is the interest rate that the bank charges its credit worthy customers
20. What factors determine interest rates?
Economic condition, markets forces and inflation out looks.
21.How do interest rates influence the quantity of money available in the economy?
It only influences the federal funds rate. They end up losing some money and must borrow or lend funds to each other to make those adjustment to get back money

Elijah Friday 10/8/08 Document1

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