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68 Cards in this Set
- Front
- Back
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R equals
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The reserve ratio
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What are the functions of money
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1) money as a medium of exchange 2) money is a unit of account 3) money as a store of value |
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How does money work
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Serves as a medium of exchange, unit of account and store of value |
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How is money superior to barter
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Money doesn't deal with coincidence of wants |
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What are the desirable characteristics of money
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Scarcity, portable, divisible, uniform |
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M1
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The narrowest definition of the money supply. It includes currency and checkable deposits |
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M2
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the definition money supply that equals M1 plus near monies, such as savings deposits and smalltime deposits of less than $100,000 |
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What are the components of M1
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Currency and Checkable Deposits. |
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What are the components of M2
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Everything in M1, Near Monies,savings deposits, and deposits >$100,000 |
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What are the current levels of M1
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As of 2011, M1 has 1,174 billion in checkable deposits, 1,000 billion in currency |
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What are the current levels of M2
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As of 2011, the 2,174 billion of M1, small time deposits of 760 billion, and savings/small time 6,706 billion |
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What's the difference between commodity money and fiat money
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Commodity has a market value. Fiat is recognized as currency because of the law. |
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What is used for money in Yap? What are the advantages and disadvantages?
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Giant Stones is used as money. It's advantages is they are scarce enough to be used as currency, improbable to steal and counterfeit. Disadvantages are they are too big. |
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Why did wampum fall out of use as money |
It was easy to counterfeit |
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What was the money used during the Revolution and what happened to it?
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They were called continentals. They lost value for being created too quickly. |
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Why is the money multiplier smaller than the 1/r formula indicates
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Because ones money can be put into their pocket, or because the bank refuses to give up excess reserves |
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Monetary control Act |
A law that gives Federal Reserve System greater control over nonmember banks and made all financial institutions more competitive |
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Federal Deposit Insurance Corporation |
A government agency established in 1933 to insure customer deposits up to a limit if a bank fails |
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Federal Open Market Committee |
Fed's committee that directs the buying and selling of US government securities |
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Federal Reserve System |
The 12 Federal Reserve District Banks that service banks and other financial institutions within each of the federal reserve districts |
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Board of Governors of the Federal Reserve System |
The seven members appointed by the president and confirmed by the US Senate who serve for one nonrenewable 14 year term |
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Medium of Exchange |
The primary function of money to be widely accepted in exchange for good and services |
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Unit of Account |
The function of money to provide a common measurement of the relative value of goods and services |
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store of value |
the ability of money to hold value over time |
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discount rate |
the interest rate the FED charges on loans of reserves to bank |
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federal funds market |
a private market in which banks lend reserves to each other for less than 24 hours |
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federal funds rate |
the interest rate banks charge for overnight loans of reserves to other banks |
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Open Market Operations |
The buying and selling of government securities by the federal reserve system |
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Monetary Policy |
The federal reserve's use of open market operations, changes in the discount rate, and changes in the required reserve to change the money supply |
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Money Multiplier |
The Maximum change in the money supply due to an initial change in the excess reserves banks hold. |
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excess reserves |
Potential loan balances held in vault cash or on deposit with the Fed excess of the required reserves |
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required reserve ratio |
The percentage of deposits that the Fed requires a bank to hold in vault cash or on deposit with the Fed |
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required reserves |
the minimum balance that the Fed requires a bank to hold in vault cash or on deposit with the Fed |
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Fractional Reserve Banking |
a system in which banks keep only a percentage of their deposits on reserve as vault cash and deposits at the Fed |
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What are the motives for money demand |
Transaction Demand, Precautionary Demand, and speculative Demand |
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What is the equation of exchange |
An accounting identity that states the money times the velocity of money equals total spending
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What do all the equation of exchange variables mean |
M equals money supply in circulation
V equals velocity of money P equals yearly average selling price Q equals of of final goods and services |
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What does the equation of exchange tell us about monetary policy according the monetarists |
If the money supply expands too much, inflation is coming.
If money supply contracts too much, recession is coming |
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What are the two general causes of recession |
1) Low interest rates in the U.S. and Europe following the 2000-2001 U.S. recession
2) Significant growth in savings available from developing nations due to ongoing trade imbalances |
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What is the efficiency wage theory |
Level of high pay that avoid shirking, reduce turnover, and attract productive employees.
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What is the insider-outsider theory |
Bringing in outsiders to work will start a civil war in the business, due to belief the insider may be getten rid of
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How do Keynesians and Monetarists differ over the economy's ability to self correct? |
Monetarists would force fixed growth until the economy self-corrects. Keynsians would use tax hikes and/or spending cuts, along with applying income policies.
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What is supply side economics. |
argues economic growth can be most effectively created by investing in capital and by lowering barriers on the production of goods and services.
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What is the Laffer curve |
the relationship between tax rates and total tax revenues |
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transactions demand for money |
the stock of money people hold to pay everyday predictable expenses |
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precautionary demand for money |
the stock of money people hold to pay unpredictable expenses |
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speculative demand for money |
the stock of money people hold to take advantage of expected future changes in the price of bonds, stocks, or other nonmoney financial assets |
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Demand for money curve |
A curve representing the quantity of money that people hold at different possible rates, ceteris pariubs |
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monetartism |
the theory that changes in the money supply directly determine changes in prices, real GDP, and employment |
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Equation of exchange |
An accounting identity that states the money supply times the velocity of money equals total spending |
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velocity of money |
the average number of times per year a dollar of the money supply is spent on final good and services |
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Quantity theory of money |
the theory that changes in the money supply are directed to changes in the price level |
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classical economics |
the theory that free markets will restore full employment without government intervention |
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keynesian economics |
the theory, first advanced by John Maynard Keyes, that the role of the federal government is to increase or decrease AD to achieve economic goals |
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subprime mortgage loan |
A home loan made to brrowers with an above-average risk of default |
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Phillips Curve |
A curve showing an inverse relationship between the inflation rate and unemployment rate |
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natural rate hypothesis |
the hypothesis that argues that the economy will self correct to the natural rate of unemployment. The long run phillips curve is therefore a vertical line at the natural rate of unemployment |
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adaptive expectations theory |
the concept that people believe the best indicator of the future is recent information. As a result, people persistently underestimate inflation when it is accelerating and and overestimating it while it is slowing down |
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political business cycle |
a business cycle caused by policymakers to improve politicians' reelection chances |
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income policies |
federal government policies designed to affect the real income of workers by controlling nominal wages and prices. |
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Jawboning |
Oratory intended to pressure unions and businesses to reduce wage and price increases |
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Wage and price guidelines |
Voluntary standards set by the government permissable wage and price increases |
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wage and price controls |
legal restrictions on wage and price increases. violations can result i fines and imprisonment |
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The natural rate hypothesis argues the economy ________-_________ to the natural rate of ______________________ |
self-corrects; unemployment |
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with natural rate hypothesis the phillips curve is a vertical line at the _________________________ |
natural rate of unemployment |
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adaptive expectations theory is that people |
base their economic forecasts on recent past information rather than future information |
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political business cycle |
created by the incentive to get relected. use expansionary policies to stimulate the economy before the election, and contract the economy after the election to fight inflation and unemployment. |
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Rational expectations theory |
it's naive to think people change their beliefs based on current inflation rates |
