Economics: Money Supply and Demand Deposits

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What is the primary consequence of a significant increase in the money supply in an economy?

An imbalance between the amount of money and the quantity of goods and services

What is the main component of the M1 money supply?

Physical currency and demand deposits

What is the primary purpose of open market operations?

To control the money supply and influence interest rates

What is the main source of revenue for banks?

Borrowing money from depositors and compensating them with a certain interest rate

What are excess reserves in banking?

Reserves held by a bank in excess of a reserve requirement set by a central bank

What is the discount rate in banking?

The interest rate charged by a central bank on loans to commercial banks

What is the interest rate that the Federal Reserve charges commercial banks and other financial institutions for?

Short-term loans

What is the general idea behind the quote from Milton and Rose Friedman?

That voluntary exchanges will not occur unless both parties believe they will benefit

What does an increase in the nominal rate of interest tend to do?

Increase borrowing costs and reduce consumer spending

What happens to the opportunity cost of holding money when interest rates decrease?

It decreases, making holding money more attractive

What are the factors that influence the demand for money?

Interest rates, income levels, and transaction needs

What happens to the demand for money when income and interest rates rise?

It tends to increase

What would be the short-run effect of the Federal Reserve increasing its bond purchases?

Lower interest rates and increased money supply

What is the potential effect of an increase in the money supply?

Lower interest rates and inflation

What would the Federal Reserve most likely do in the event of a recession?

Implement expansionary monetary policies

When would an expansionary monetary policy most likely increase real output?

During a period of economic recession

What is the primary cause of inflation?

An increase in the overall money supply

What is the velocity of money?

The rate at which money is exchanged in an economy

What is the primary objective of rational choice decision-making?

To maximize preferences or utility

What is the opportunity cost of choosing a particular option?

The value of the next best alternative forgone

What does a demand schedule indicate?

The quantity of a good or service that consumers are willing and able to purchase

What is the law of demand?

The principle that, all else being equal, as the price of a good or service decreases, the quantity demanded increases

What is consumer surplus?

The difference between the maximum willingness to pay and the market price

What causes a shift in the demand curve?

A change in consumer tastes

What is the result of subtracting total costs from total revenue in a business or economic activity?


What is a characteristic of entrepreneurs?

Innovation and willingness to take risks

What happens to the price of a product when there is a surplus in the market?

It decreases

What is a necessary condition for market equilibrium and market efficiency to be consistent?

Equilibrium price and quantity

What may lead to changes in the quantity demanded for certain products?

Changes in consumer preferences

Test your understanding of the money supply, including the concept of an imbalance between the amount of money and available goods and services, and the components of M1 money supply. Learn about demand deposits, their characteristics, and how they fit into the economy.

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