Money And Banking (Group 3)

Front 1

What are the two questions every central bank must answer in order to perform its macro stabilization role?

Back 1

a) how does the macroeconomy work? b) how will changes in money supply & credit conditions affect the economy

Front 2

______ (incomplete)

Back 2

monetary theory

Front 3

Before 1930, what was the prevailing school of economic thought

Back 3

"Classical Economics"

Front 4

Before 1930, what was the prevailing view of the proper role of government?

Back 4

"get out of the way" (laissez-faire economics)

Front 5

What was Say's Law?

Back 5

supply creates demand (OR if you build it, buyers will come)

Front 6

we call payment for land _____

Back 6

rent

Front 7

we call payment for labor _____

Back 7

wages

Front 8

we call payment for capital ____

Back 8

interest

Front 9

if entrepreneurs make money, it's called _____

Back 9

profit

Front 10

If entrepreneurs lose money, it's called _____

Back 10

losses

Front 11

_______ is the idea that every dollar an entrepreneur invests in labor, capital, or land results in at least $1 in revenue

Back 11

circular flow of production

Front 12

How can the practice of saving a portion of one's wages hurt the economy?

Back 12

If people aren't spending all their wages, then inputs are greater than outputs. Businesses respond by reducing production.

Front 13

How did the classical economists resolve the problem of savings habits undermining production?

Back 13

They postulated that investments by businesses would balance out savings. (maybe not immediately, but eventually)

Front 14

implications of flexible interest rate (r): Investment(I) & Savings(S) levels naturally equate, so economy moves naturally to __________ (according to the Classical economists)

Back 14

full employment

Front 15

According to the Classical economists, flexible interest rate(r), wages(W), & prices(p), naturally lead to _______

Back 15

full employment & full production

Front 16

According to the Classical economists, what would be the effect of a change in the money supply?

Back 16

According to the Classical economists, a change in the money supply would cause a proportional change in the overall level of prices(p) without really producing any more goods or services (inflation)

Front 17

The idea that a change in the money supply (M) causes a proportional change in the overall level of prices (P) is known as _______

Back 17

The "Quantity Theory of Money"

Front 18

Which school of thought concocted the "Quantity Theory of Money"?

Back 18

Classical Economics

Front 19

When GDP increases, what's the role of the Fed (in theory)?

Back 19

To modestly increase the money supply.

Front 20

What event (and observations) inspired Keynes' ideas?

Back 20

The Great Depression caused Keynes to doubt that the economy moves to full employment on its own

Front 21

What did Keynes say was wrong with Say's law (supply creates demand) in the short run?

Back 21

Keynes challenged the idea that increased savings were matched by increased borrowing(investing) by businesses. He suggested that businesses see decreased consumption and respond by decreasing production.

Front 22

What does the term "sticky" mean when used to describe prices and wages?

Back 22

Prices and wages rarely go down. (Deflation is rarely observed)

Front 23

What was the implication of Keynes' theory? "__________ creates ______"

Back 23

Demand creates supply

Front 24

True or False: Keynes believed "equilibrium" in the economy did not necessarily result in full employment

Back 24

True

Front 25

True or False: Keynes believed "equilibrium" in the economy necessarily resulted in full employment

Back 25

False. Keynes believed "equilibrium" in the economy did not necessarily result in full employment

Front 26

Did Keynes prefer monetary policy or fiscal policy to "boost" the economy? Why?

Back 26

Keynes preferred Fiscal policy (government spending) because he saw monetary policy changes as unpredictable since it relies on the private sector to "jump in" and start spending.

Front 27

____________ is the amount of cash and checking-account balances the general public wishes to hold at any point in time.

Back 27

money demand

Front 28

According to Keynes' short-run view, what determines interest rates?

Back 28

Money market and bond market

Front 29

As a person's income rises over time, the tendency is for their checking account balances to ______

Back 29

rise also

Front 30

The economy's demand for money as a whole is a function of _______

Back 30

GDP

Front 31

__________ is the ability to convert an asset into the medium of exchange quickly without taking a financial loss

Back 31

liquidity

Front 32

Demand for Money (M_d) is dependent on what two things?

Back 32

GDP and interest rate

Front 33

What is known as the investor's "basic decision"?

Back 33

how much bonds to hold in portfolio in order to maximize return without taking excessive risk & while maintaining sufficient liquidity

Front 34

The Fed seeks to contract the money supply when _________

Back 34

inflation is a concern and unemployment is relatively low

Front 35

What types of behavior does the Fed seek to encourage/discourage when inflation gets too high?

Back 35

The Fed seeks to discourage spending so that prices will stop rising.

Front 36

What is the "short run tradeoff"?

Back 36

Practices that bring down inflation tend to increase unemployment, and vice versa.

Front 37

The "cost of capital" is another term for what?

Back 37

Interest rate (cost of borrowing money)

Front 38

What is the wealth effect?

Back 38

The idea that lower interest rates push bond(security) prices up, increasing personal wealth and causing an increase in consumption spending.

Front 39

When the Fed undertakes expansionary monetary policy, it tends to (increase?/decrease?) the value of the dollar.

Back 39

decrease

Front 40

When interest rates are low, does that increase or decrease the demand for Treasury securities?

Back 40

decrease (lower interest rates are less attractive to foreign investors)