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98 Cards in this Set
- Front
- Back
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What is traded using the Nominal Exchange rate? (e)
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Currency for Currency
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What is traed using the Real Exchange Rates? (E)
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Good/services for good/services
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What is PPP?
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Purchasing Power Parity
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Generally:
E= |
E=eP/P*
P= general price level (domestic) P*=(foreign) |
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IF PPP hold than E=1....sooooo?
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1=eP/P*
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If p
P =eP than..... |
e=P*/P
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Why might PPP not hold?
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Non-tradeable goods/services(internationally)
imperfect substitutes |
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What is Classical Dichotomy?
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Theoretical speration of nominal and real variables
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What is Monetary Neutrality?
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money supply does not affect real variables.
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Is the market for money the same as loanable funds?
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No
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Who has control of the supply of money?
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The fed has control
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Why is there a demand for money?
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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 |
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What is 1 ?
----- P |
the value of money (how much the dollar is worth)
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Real variables are measured in?
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physical units
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Nominal variables are measured in?
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monetary units (money)
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Monetary policy is the management of what?
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the money supply
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fiscal policy is the manage of the __________ and __________
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tax revenues and expenditures
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what are some examples of fiscal policy?
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-income tax codes
-welfare programs -infrastructure and public goods |
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What are some monetary policy examples?
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-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 |
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How many federal reserve districts are there?
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12
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What is money?
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the set of assets in an economy that people regularly use to buy goods and services from other people
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what is wealth?
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all assets of value
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what is liquidity
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the ease with which an asset can be converted into the economy’s medium of exchange
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what is commodity money?
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Money that takes the form of a commodity with intrinsic value
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what is fiat money?
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money without intrinsic value that is used because of gov’t decree
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what is a unit of account?
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The “yard stick” people use to post prices and record debts
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what is store of value?
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An item that people can use to transfer purchasing power from the present to the future.
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what is the money stock?
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quantity of money circulating in the economy
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what is currency?
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the paper bills and coins in the hands of the public
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what are demand deposits?
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balances in bank accounts that depositors can access on demand by writing a check
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in what form is most of the money in the economy in?
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account balances
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what does M1 refer to?
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the money supply
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what is M1?
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all currency+all demand deposits
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is the fed funded by congress?
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no!
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what is the feds major guiding principle?
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stability
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how many members on the board of goveners for the fed?
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7 people to 14 year terms
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how many regional banks does the fed have?
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12 regional banks
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how does the ged regulate the health of the nations banking system?
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-check clearing
-banking financial conditions |
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what is the role of the fed?
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1. health of the nations banking system
2.control of the money supply |
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what is monetary policy?
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the setting of the money supply by policy makers in the central bank
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what is fiscal policy?
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management of tax revenues and expenditures
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what is the role of the fed?
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1. health of the nations banking system
2.control of the money supply |
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How does the fed control the money supply?
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1. open market operations
2. reserve requirements 3. discount rate |
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what are the two types that money comes in?
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commodity and fiat
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what is monetary policy?
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the setting of the money supply by policy makers in the central bank
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what is fiscal policy?
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management of tax revenues and expenditures
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How does the fed control the money supply?
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1. open market operations
2. reserve requirements 3. discount rate |
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what are the two types that money comes in?
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commodity and fiat
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what is the role of the fed?
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1. health of the nations banking system
2.control of the money supply |
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what is monetary policy?
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the setting of the money supply by policy makers in the central bank
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what is fiscal policy?
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management of tax revenues and expenditures
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How does the fed control the money supply?
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1. open market operations
2. reserve requirements 3. discount rate |
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what are the two types that money comes in?
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commodity and fiat
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what is the role of the fed?
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1. health of the nations banking system
2.control of the money supply |
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what is monetary policy?
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the setting of the money supply by policy makers in the central bank
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what is fiscal policy?
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management of tax revenues and expenditures
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How does the fed control the money supply?
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1. open market operations
2. reserve requirements 3. discount rate |
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what are the two types that money comes in?
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commodity and fiat
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what is the role of the fed?
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1. health of the nations banking system
2.control of the money supply |
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what is monetary policy?
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the setting of the money supply by policy makers in the central bank
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what is fiscal policy?
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management of tax revenues and expenditures
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How does the fed control the money supply?
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1. open market operations
2. reserve requirements 3. discount rate |
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what are the two types that money comes in?
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commodity and fiat
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what are the three tools of the fed?
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1. open market operatios
2. reserve requirement 3. discount rate |
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what effects in the economy do changes in the money supply have?
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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. |
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is the fed in perfect control of the money supply?
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no (got money in your pocket?)
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what are open market operations?
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is the buying/selling of U.S. treasury bonds in order to increase/decrease the money supply.
(primary tool of the fed) |
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what is an open market purchase?
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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. |
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what is an open market sale?
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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. |
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what is the FOMC?
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the federal open market committee
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what are reserve requirements?
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are regulations on the minimum amount of reserves that banks must hold against deposits.
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how does changing the reserve requirements change the moeny supply?
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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. |
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what are reserves?
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deposits that banks have received, but have not loaned out
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what is fractional reserve banking?
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not holding 100% of demand deposits on reserve
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what is the reserve ratio?
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The fraction of deposits that banks hold as reserves
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what is a T-Account?
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A simplified accounting statement that shows changes in a bank’s assets and liabilities
Assets must equal liabilities |
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how is money created with fractional reserve banking?
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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. |
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what is the money multiplier?
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the amount of money the banking system generates with each dollar of reserves.
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The money multiplier is the reciprical of the reserve ratio
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M = 1/R
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what is the discount rate?
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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 |
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What is the feds fund rate?
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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 |
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what is inflation?
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the % change in the price-level from one year to the next as measured by the CPI, GDP deflator, or other index.
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what is hyperinflation?
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an extraordinarilly high rate of inflation
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is the supply of money elastic or inelastic?
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it is perfectly inelastic
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why when prices are higher is there a higher demand for money?
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because of the higher prices, people need more money to pay those prices
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what is the quantity theory?
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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.
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How the price level is determined and why it might change over time is called the?
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quantity theory of money
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what is the primary cause of inflation?
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the growth in the quantity of money
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what is the classical dichotomy?
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the theoretical seperation of nominal and real variables
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The irrelevance of monetary changes for real variables is called...?
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monetary neutrality
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what does V= in theqantity theory equation?
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Velocity of money – the rate at which money changes hands
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What does M= in the quantity theory equation? P=? Y=?
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M= quantity of money
P= general price level Y= real GDP |
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what is M*V=P*Y
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the quantity theory equation
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changes in the money supply only result in changes in the price level…in the long run!
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this is important
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how can the gov't raise money?
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Taxes
Borrow Print Money |
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what is inflation tax?
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the revenue the gov’t raises by creating money
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what is the fischer effect?
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refers to a one-to-one adjustment of the nominal interest rate to the inflation rate.
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what is te fischer equation?
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R = r + π
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