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Macro Econ Chap 6 > Chap 6 > Flashcards

Chap 6 Flashcards

1
Q

What is money?

A

anything that is generally acceptable in making exchanges

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2
Q

What is barter?

A

trading without the use of widely accepted means of exchange

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3
Q

What is a double coincidence of wants?

A

both parties want what the other is providing

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4
Q

What are some goods Adam Smith listed that evolved into money?

A

labor, cattle, salt, cowry shells, cod, rai stones, mackrel

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5
Q

What are the functions of money?

A

1.medium of exchange 2. unit of account 3. store of value

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6
Q

Medium of Exchange

A

generally accepted and convenient in exchange

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7
Q

Unit of Account

A

each unit of money is “worth” the same amount

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8
Q

Store of Value

A

holds value over time

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9
Q

What is commodity money?

A

money that has other uses

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10
Q

What is fiat money?

A

money that doesn’t have other uses

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11
Q

What is liquidity?

A

the ease with which an asset can be converted to spendable form

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12
Q

What is M1 the sum of?

A

paper currency held outside the banks, checking account balances and travelers checks

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13
Q

Why was the Federal Reserve created?

A

to stabilize the banking system by being a lender to troubled banks
previously done by other banks but state wanted control

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14
Q

Who does the Fed depend on for a budget?

A

itself

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15
Q

Who is on the board of governors (representing Fed. gov) for the Fed?

A

7 governors that serve 14 years
and a chairman that serves 4 years
(appointed by pres/senate)

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16
Q

What is monetary policy?

A

how the Fed uses money supply to attempt to affect the economy

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17
Q

Who conducts monetary policy?

A

Federal Open Market Committee

18
Q

Who is on the Federal Open Market Committee?

A

The Board of Governors, President of NY Federal Reserve Bank, Presidents of 11 other district banks rotate

19
Q

What are the 3 tools of monetary policy?

A

Open Market Operations
The Required Reserve Ratio
The Discount Rate

20
Q

What is Open Market Operations?

A

buying and selling U.S. bonds from individuals/businesses who previously bought them from the government

21
Q

What is the Required Reserve Ratio?

A

the Fed sets a % of deposits that bank cannot lend out, but must hold as reserves

22
Q

What is a banks reserves?

A

its vault cash plus the banks account with the Fed

23
Q

What are a banks excess reserves?

A

reserves the banks hold in excess of those the Fed requires

24
Q

What is the current required reserve ratio?

A

10%

25
Q

What is the discount rate?

A

the interest rate a bank pays when it borrows from the Fed

26
Q

What is the Federal Funds Rate?

A

a free market rate at which banks lend to other banks

27
Q

If the Fed lowers the interest rates by a point it means…(regarding money supply)

A

the money supply is increased until the Free Market Funds Rate falls by a point

28
Q

Why does the Fed prefer open market operations?

A
  1. the Required Reserve Ratio can cause swings in lending and
  2. ambivalence of borrowing from Fed makes the Discount rate a weak tool
29
Q

What is the formula for the eventual increase in money supply for $1000

A

$1000/.1 = 10000

30
Q

How does money simplify exchange?

A

by giving a common unit of account

31
Q

What does the value of a dollar in the domestic economy depend on?

A

how many and which goods and services it will buy

32
Q

What is the CPI?

A

Consumer Price Index

33
Q

What is the CPI based on?

A

a weighted average of prices- weighted by the amounts of the goods consumers purchase

34
Q

What does the PCE price index exclude?

A

fuel and food

35
Q

How does the CPI measure prices?

A

comparing the cost of a market basket at a period of time to the cost of the same market in some “base year”

36
Q

How do you find the Price Index?

A

PI= (cost of market basket in period of interest) / (cost of market basket in base period) x 100

37
Q

How do you calculate inflation?

A

Inflation year 1 to year 2 = (CPI year 2 - CPI year 1) / CPI year 1

38
Q

What is nominal income?

A

the number on the paycheck

39
Q

What is real income?

A

how much stuff you can buy

40
Q

What is the inflation rate?

A

% change in the price index

Macro Econ Chap 6 (1 decks)

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