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41 Cards in this Set
- Front
- Back
The overall increase in prices is known as: _________
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Inflation.
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What is happening when prices rise as inflation falls?
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Disinflation. This really happened in the 1980s.
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A sustained decrease in price levels is known as ________ (negative inflation rate).
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Deflation.
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Germany experienced a period of ______________ in 1923, when prices increased an average of 500% per month.
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Hyperinflation.
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This is the stock of assets that can be readily used to make transactions.
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Money!
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Money has _ functions. They are:
1. 2. 3. |
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1. Store of Value 2. Unit of Account 3. Medium of Exchange |
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Store of Value means that money can do what?
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Transfer purchasing power from the present to the future.
Example: if I work today and earn $100.00, I can hold it (store the value) and spend it tomorrow. |
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Unit of Account means what about money?
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Unit of Account means that money creates a fixed unit measurement to quote prices and settle debts.
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As a medium of exchange, money is used to do what?
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Buy goods and services.
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Money can either be classified as _____ money or _________ money. What is the difference between the two?
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Fiat or Commodity.
Fiat money is money with no intrinsic value (like dollar bills). Commodity money is money with intrinsic value (like gold). |
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Money supply is defined as:
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The quantity of money available in the economy.
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Monetary policy pertains to what and is controlled by whom?
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Monetary policy pertains to the government's control over the money supply and is usually controlled by the central bank (the Fed).
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How does the Fed control the money supply?
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Open-market operations
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What are the three measures of money?
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C - Currency
M1 - Currency + Demand Deposits M2 - M1 + retail money market mutual funds, savings deposits |
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Demand deposits consist of:
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Funds in peoples' checking accounts.
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The quantity theory of money states that the more money people need for transactions, the _____ money people hold.
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more
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The quantity equation is expressed as:
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(money)(velocity) = (price)(transactions)
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In the quantity equations, the right side of PRICE x TRANSACTIONS can be substituted with PRICE x _______?
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Output Y (GDP)
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The income velocity of money tells economists what?
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How many times a dollar bill enters someone's income in a period of time.
The income velocity equation is the most common quantity theory equation: (money)(velocity) = (price)(output) |
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Real money balances indicate what and are represented by what equation?
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Real money balances indicate the quantity of money in terms of the quantity of real products that money can buy.
The equation is M/P |
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Money Demand Function
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The equation that shows the determinants of the quantity of real money balances people wish to hold. It is expressed as:
M/P = L(r + Eπ, Y) |
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Seigniorage is revenue raised from what activity?
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Printing money
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i = r + π is what equation?
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The Fisher Equation. It shows that interest rates change for two reasons:
1. the real interest rate changes. (r) 2. inflation changes. (π) |
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A one-to-one relationship between inflation (π) and nominal interest rate (i) is called the ________ ________.
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Fisher Effect
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The interest rate that the borrower and lender expect when a loan is made is the __ ____ interest rate. It is expressed as:
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Ex ante
i - Eπ |
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The interest rate that is realized when loaning money is the __ ___ interest rate. It is expressed as:
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Ex post
i - π. |
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Shoeleather costs refer to the costs of __________ the money held. It is the first cost of inflation.
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reducing; if you reduce the amount of money physically held, you have to walk to the bank more and thus, wear out your shoe leather.
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Menu costs are the second cost of inflation. Menu costs are:
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costs associated with reprinting items with prices (such as menus) to keep up with inflation.
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What does the quantity theory of money imply about long term inflation?
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The quantity theory of money implies that, over the long term, the central bank has control over inflation because it controls the money supply.
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What two factors affect investment demand?
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Technological Advances
Tax Laws change |
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Why does the government increase the money growth rate?
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To raise money through seignoraige. It earns revenue off of printing money, like an inflation tax.
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Explain the relationship between πe, i, and Md.
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πe is expected inflation.
i is nominal interest rate. Md is money demand. If πe increases (people anticipate inflation), then i increases as well. When i increases, Md decreases. People don't want to pay more (i) to hold money (M). |
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What are the social costs of expected inflation?
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1. Shoeleather Costs.
2. Menu Costs. 3. Variability in Pricing. 4. Changing tax liability 5. Inconvenience of inconsistent price levels. |
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What are the social costs of unexpected inflation?
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1. Wealth is arbitrarily redistributed.
2. Those on fixed incomes are hurt by rapid inflation. |
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Describe the functions of money.
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Money:
1. Stores Value (transfers purchasing power from now to the future) 2. Is a Unit of Account (provides an increment to benchmark with) 3. Is a Medium of Exchange (allows people to buy and sell goods/services) |
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What is fiat money? What is commodity money?
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Fiat money is money with no intrinsic value, like the dollar bill.
Commodity money is money with intrinsic value, like gold. |
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Who controls the money supply and how?
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The central bank (the Fed in the US) controls the money supply through monetary policy.
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Explain the quantity equation.
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The quantity equation (MV = PY) explains the relationship between the amount of money in the economy and the dollars exchanged in transactions.
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What does the assumption of constant velocity imply?
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The assumption of constant velocity implies that the quantity of money determines the dollar value of the economy's output.
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Who pays the inflation tax?
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People who use money.
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If inflation rises from 6 to 8 percent, what happens to real and nominal interest rates according to the Fisher effect.
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If inflation rises two percent, then real and nominal interest rates increase by two percent. The Fisher Effect represents a one for one relationship between inflation and interest rates.
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