Money: asset that can be used in making purchases

Roles of money
Medium of exchange: asset to purchase a good or service
Store of value: asset used as a means to hold wealth
Unit of account: Basic measure of an economic value
Measuring the money supply – M1: sum of currency out standings and balances held in checking
accounts
Bank reserves: cash or similar assets held by commercial banks for the purpose of meeting depositors
withdrawals and payments.
Creation of money by commercial banks: CD's
Federal Reserve: Central Bank in US
Open market operations: FOMC makes decisions concerning monetary policy
Money Supply = currency helped by the public + Bank deposits
Bank deposits = Bank reserves / desired reserve-deposits ratio
When the Fed sells government securities, the banks reserves will decrease and lending will contract
causing a decrease in the money supply.
Money supply and inflation: rate of growth of Money Supply equals rate of inflation
Velocity of money: Speed of the circulation of money
Quantity equation/equation of exchange: M x V = GDP = P x Q
M = Money Stock, P = Price Level, Y = Real GDP
Capital flows: (inflow - outflow)
inflows: purchase domestic by foreign
outflows: purchase foreign assets by domestic
Potential output: max amount an economy can produce Y*.
Output gaps = Y* - Y (potential out)
if Output gap is positive: recessionary gap
negative: expansionary gap (could cause an inflation)
Natural rate of unemployment: frictional and structural unemployment
Cyclical unemployment: unemployment in recessions
Cyclical unemployment= u (actual unemployment)– u*(natural rate of unemployment)
Income-expenditure multiplier: multiplier of a short run equilibrium
Keynesian cross diagram of PAE and Y

Fiscal policy: government budget and how much tax input

Stabilization: government policies affect aggregate expenditure to eliminate output gaps
Get rid of Recession: tax cuts and increased government expenditures.
Problems with fiscal policy as a stabilization tool: doesn't have effect on money supply
Monetary policy and the Fed: sell bonds reduces Money Supply and increase nominal
Tools to regulate money supply: the Fed controls nominal by changing money supply.
 Reserve requirement: min values of ratio of bank deposits that commercial banks are allowed to
maintain
Discount rate: interest rate on commercial banks to borrow reserves
Fed and interest rates
Demand for money holdings (basic idea, not calculation)
Factors that affect demand for money holdings
Money demand curve
Fed’s money supply curve
Graphing money holdings (nominal interest rate)
Federal Funds rate
Fed and short run real interest rate
Aggregate Demand, idea and graph
Aggregate Supply, ideas and graphs
AD-AS graph
Equilibrium in the AD-AS market