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98 Cards in this Set

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  • Back
What is traded using the Nominal Exchange rate? (e)
Currency for Currency
What is traed using the Real Exchange Rates? (E)
Good/services for good/services
What is PPP?
Purchasing Power Parity
Generally:

E=
E=eP/P*

P= general price level (domestic)

P*=(foreign)
IF PPP hold than E=1....sooooo?
1=eP/P*
If p
P =eP than.....
e=P*/P
Why might PPP not hold?
Non-tradeable goods/services(internationally)

imperfect substitutes
What is Classical Dichotomy?
Theoretical speration of nominal and real variables
What is Monetary Neutrality?
money supply does not affect real variables.
Is the market for money the same as loanable funds?
No
Who has control of the supply of money?
The fed has control
Why is there a demand for money?
1. people use money as a medium of exchange
2.higher prices, P lead to greater demand for money
3.People's preferences for how much wealth to store as money
What is 1 ?
-----
P
the value of money (how much the dollar is worth)
Real variables are measured in?
physical units
Nominal variables are measured in?
monetary units (money)
Monetary policy is the management of what?
the money supply
fiscal policy is the manage of the __________ and __________
tax revenues and expenditures
what are some examples of fiscal policy?
-income tax codes
-welfare programs
-infrastructure and public goods
What are some monetary policy examples?
-dictating how much of the depositors money is to be held at the bank in the form of reserves.
-raising or lowering the interest rates to cool off or speed up the economy
How many federal reserve districts are there?
12
What is money?
the set of assets in an economy that people regularly use to buy goods and services from other people
what is wealth?
all assets of value
what is liquidity
the ease with which an asset can be converted into the economy’s medium of exchange
what is commodity money?
Money that takes the form of a commodity with intrinsic value
what is fiat money?
money without intrinsic value that is used because of gov’t decree
what is a unit of account?
The “yard stick” people use to post prices and record debts
what is store of value?
An item that people can use to transfer purchasing power from the present to the future.
what is the money stock?
quantity of money circulating in the economy
what is currency?
the paper bills and coins in the hands of the public
what are demand deposits?
balances in bank accounts that depositors can access on demand by writing a check
in what form is most of the money in the economy in?
account balances
what does M1 refer to?
the money supply
what is M1?
all currency+all demand deposits
is the fed funded by congress?
no!
what is the feds major guiding principle?
stability
how many members on the board of goveners for the fed?
7 people to 14 year terms
how many regional banks does the fed have?
12 regional banks
how does the ged regulate the health of the nations banking system?
-check clearing
-banking financial conditions
what is the role of the fed?
1. health of the nations banking system
2.control of the money supply
what is monetary policy?
the setting of the money supply by policy makers in the central bank
what is fiscal policy?
management of tax revenues and expenditures
what is the role of the fed?
1. health of the nations banking system
2.control of the money supply
How does the fed control the money supply?
1. open market operations
2. reserve requirements
3. discount rate
what are the two types that money comes in?
commodity and fiat
what is monetary policy?
the setting of the money supply by policy makers in the central bank
what is fiscal policy?
management of tax revenues and expenditures
How does the fed control the money supply?
1. open market operations
2. reserve requirements
3. discount rate
what are the two types that money comes in?
commodity and fiat
what is the role of the fed?
1. health of the nations banking system
2.control of the money supply
what is monetary policy?
the setting of the money supply by policy makers in the central bank
what is fiscal policy?
management of tax revenues and expenditures
How does the fed control the money supply?
1. open market operations
2. reserve requirements
3. discount rate
what are the two types that money comes in?
commodity and fiat
what is the role of the fed?
1. health of the nations banking system
2.control of the money supply
what is monetary policy?
the setting of the money supply by policy makers in the central bank
what is fiscal policy?
management of tax revenues and expenditures
How does the fed control the money supply?
1. open market operations
2. reserve requirements
3. discount rate
what are the two types that money comes in?
commodity and fiat
what is the role of the fed?
1. health of the nations banking system
2.control of the money supply
what is monetary policy?
the setting of the money supply by policy makers in the central bank
what is fiscal policy?
management of tax revenues and expenditures
How does the fed control the money supply?
1. open market operations
2. reserve requirements
3. discount rate
what are the two types that money comes in?
commodity and fiat
what are the three tools of the fed?
1. open market operatios
2. reserve requirement
3. discount rate
what effects in the economy do changes in the money supply have?
In the long-run it may just result in inflation

In the short-run changes in the money supply affect the interest rate…which in turn affect investment, consumption, and hence future consumption/production/income.
is the fed in perfect control of the money supply?
no (got money in your pocket?)
what are open market operations?
is the buying/selling of U.S. treasury bonds in order to increase/decrease the money supply.

(primary tool of the fed)
what is an open market purchase?
When the fed. goes into the bond market and purchases government bonds at the going rate.

An open market purchase will increase the money supply.
what is an open market sale?
When the fed. goes into the bond market and sells government bonds at the going rate.

An open market sale will decrease the money supply.
what is the FOMC?
the federal open market committee
what are reserve requirements?
are regulations on the minimum amount of reserves that banks must hold against deposits.
how does changing the reserve requirements change the moeny supply?
The reserve requirement is the amount (%) of a bank’s total reserves that may not be loaned out.

Increasing the reserve requirement decreases the money supply.

Decreasing the reserve requirement increases the money supply.
what are reserves?
deposits that banks have received, but have not loaned out
what is fractional reserve banking?
not holding 100% of demand deposits on reserve
what is the reserve ratio?
The fraction of deposits that banks hold as reserves
what is a T-Account?
A simplified accounting statement that shows changes in a bank’s assets and liabilities


Assets must equal liabilities
how is money created with fractional reserve banking?
When one bank loans money, that money is generally deposited into another bank.

This creates more deposits and more reserves to be lent out.

When a bank makes a loan from its reserves, the money supply increases.
what is the money multiplier?
the amount of money the banking system generates with each dollar of reserves.
The money multiplier is the reciprical of the reserve ratio
M = 1/R
what is the discount rate?
the interest rate the Fed charges banks for loans.

Increasing the discount rate decreases the money supply.
Decreasing the discount rate increases the money supply
What is the feds fund rate?
the rate at which banks charge each other for very short-term (often overnight) loans.

fed does not have control of this rate but targets it
what is inflation?
the % change in the price-level from one year to the next as measured by the CPI, GDP deflator, or other index.
what is hyperinflation?
an extraordinarilly high rate of inflation
is the supply of money elastic or inelastic?
it is perfectly inelastic
why when prices are higher is there a higher demand for money?
because of the higher prices, people need more money to pay those prices
what is the quantity theory?
A theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate.
How the price level is determined and why it might change over time is called the?
quantity theory of money
what is the primary cause of inflation?
the growth in the quantity of money
what is the classical dichotomy?
the theoretical seperation of nominal and real variables
The irrelevance of monetary changes for real variables is called...?
monetary neutrality
what does V= in theqantity theory equation?
Velocity of money – the rate at which money changes hands
What does M= in the quantity theory equation? P=? Y=?
M= quantity of money

P= general price level

Y= real GDP
what is M*V=P*Y
the quantity theory equation
changes in the money supply only result in changes in the price level…in the long run!
this is important
how can the gov't raise money?
Taxes
Borrow
Print Money
what is inflation tax?
the revenue the gov’t raises by creating money
what is the fischer effect?
refers to a one-to-one adjustment of the nominal interest rate to the inflation rate.
what is te fischer equation?
R = r + π