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35 Cards in this Set
- Front
- Back
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what is a barter economy? |
economies that trade goods (not cash) |
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What is a double coincidence of wants? |
Barter economy relies on this - it is necessary for trade:
The unlikely occurrence that two people each have a good or service that the other wants |
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How can money make trading easier? |
money increases the probability of a double coincidence of wants |
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What is money? |
The set of assets that people regularly use to buy goods and services
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There are 3 characteristics of money |
it is a - medium of exchange - a unit of account -a store of value
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What is a medium of account? |
an item that buyers give to sellers when they want to purchase goods and services |
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What is a unit of account? |
a yardstick people use to post prices and record debt |
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What is a store of value |
an item people can us to transfer purchasing power over time |
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What is liquidity? |
The ease with which you can convert an asset into the medium of exchange |
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What kinds of money exist? |
1. Commodity money - has some intrinsic value 2. Fiat money - has value by decree (typically gov't) |
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What is the difference between commodity money and fiat money? |
Commodity money takes the form of commodity with intrinsic value and fiat money is money without intrinsic value that is used as money because of gov't decree |
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What is currency |
the paper bills and coins in the hands of the public |
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Which people make up the Federal Open Market Committee? |
A group of people within the Federal Reserve System: - made up of the Board of Governors - 7 members appointed by the president (approved by congress) - 12 federal reserve Regional Bank Presidents (of which only 5 are allowed to vote)
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What are reserves? |
deposits that banks have received but not loaned out (cash in the vault) |
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What is a fractional reserves banking? |
A banking system where banks only hold a fraction of deposits as reserves ( they loan money out and use it while you are not) |
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What is the money multiplier |
the amount of money the banking system generates with each dollar of reserves
money supply = money multiplier * monetary base |
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How does the fed control the money supply |
The lower the reserve requirement, the higher the money multiplier, which would increase the money supply |
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What are reserve requirements? |
the percentage of deposits the federal reserve requires banks to hold - how federal reserves regulate banks |
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What are demand deposits? |
Balances in bank accounts that depositors can access on demand via checks or credit cards |
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What is the Federal Reserve (The Fed) |
The US central bank
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What is a central bank? |
An institution designed to oversee the banking system and regulate the money supply
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What is the money supply? |
The quantity of money in an economy |
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What is monetary policy? |
decisions to increase or decrease the money supply
in the US, this is done by the FOMC (Federal Open Markey Committee) |
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What is the market for loanable funds? |
A market in which those who want to save supply funds and who those who want to borrow to invest demand funds |
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What determines money supply |
? |
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What determines money demand? |
? |
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What is the federal funds rate? |
the interest rate at which commercial banks lend/borrow to/from each other
The interest rate at which banks make overnight loans to one another |
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What is the discount rate? |
the interest rate at which the federal reserve lends to commercial banks |
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What are open market operations |
the purchase and sale of US government bonds by the Fed
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What is a classical dichotomy |
the theoretical separation of nominal and real variables: nominal things do not effect real things |
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What is monetary neutrality? |
the proposition that changes in the money supply do not affect real variables: money has no effect on GDP |
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Why might the short-run be different than the long-run? |
In the short-run: money can matter and can affect real GDP (increase money supply) In the long run: it takes time for the economy to figure out there's more money - and should have any affect on GDP
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What is the velocity of money |
- the rate at which money changes hands: - the amount of times you're exchanging money in the economy - the number of times a dollar has been reused |
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What is the quantity equation |
M x V = P x Y it relates the quantity of money, the velocity of money, and the dollar value of the economy's output of goods and services
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How does the quantity theory explain inflation? |
M x V = P x Y money x velocity = price level x Real GDP |
