11111 Flashcards
list and explain the three functions of money in a modern economy
a medium of exchange
a store of value
a measure of relative value, or a unit of account
how does fiat money differ from commodities like gold and silver that have been used as money
it is used as legal tender by government decree
how is the m2 money supply defined
currency in circulation, checking accounts, savings accounts, and most other thpes of bank accounts
explain the quantity theory of money
it assumes that money supply and nominal gdp grow at the same rate
what are the differences among inflation deflation and hyperinflation
deflation is the rate of decrease of a price index
inflation is when the growth rate of money supply exceeds the growth rate in real gdp
hyperinflation is when a country price level doubles within three years
what is the most common cause of hyperinflation
it hppens by government policy responses to large government budget deficits
what are the costs associated with inflation
it increases all prices by the same percentage
a high inflation rate creates logistical costs
sometimes leads to counterproductive policies like price controls
does inflation have any benefits?
government revenue is generated when the government prints currency
can stimulate economic activity
what is the federal funds rate?
the interest rate in this market
what are economic fluctuations?
shifts in the labor demand curve
what do multiplyers do
if theres a market downfall it becomes a compounding effect
how can contractionart monetary policy lead to an economy wide recession
it causes the real intrest rates to rise causing them to hire less labor and more of their inputs
