Chap 6 Flashcards
What is money?
anything that is generally acceptable in making exchanges
What is barter?
trading without the use of widely accepted means of exchange
What is a double coincidence of wants?
both parties want what the other is providing
What are some goods Adam Smith listed that evolved into money?
labor, cattle, salt, cowry shells, cod, rai stones, mackrel
What are the functions of money?
1.medium of exchange 2. unit of account 3. store of value
Medium of Exchange
generally accepted and convenient in exchange
Unit of Account
each unit of money is “worth” the same amount
Store of Value
holds value over time
What is commodity money?
money that has other uses
What is fiat money?
money that doesn’t have other uses
What is liquidity?
the ease with which an asset can be converted to spendable form
What is M1 the sum of?
paper currency held outside the banks, checking account balances and travelers checks
Why was the Federal Reserve created?
to stabilize the banking system by being a lender to troubled banks
previously done by other banks but state wanted control
Who does the Fed depend on for a budget?
itself
Who is on the board of governors (representing Fed. gov) for the Fed?
7 governors that serve 14 years
and a chairman that serves 4 years
(appointed by pres/senate)
What is monetary policy?
how the Fed uses money supply to attempt to affect the economy
Who conducts monetary policy?
Federal Open Market Committee
Who is on the Federal Open Market Committee?
The Board of Governors, President of NY Federal Reserve Bank, Presidents of 11 other district banks rotate
What are the 3 tools of monetary policy?
Open Market Operations
The Required Reserve Ratio
The Discount Rate
What is Open Market Operations?
buying and selling U.S. bonds from individuals/businesses who previously bought them from the government
What is the Required Reserve Ratio?
the Fed sets a % of deposits that bank cannot lend out, but must hold as reserves
What is a banks reserves?
its vault cash plus the banks account with the Fed
What are a banks excess reserves?
reserves the banks hold in excess of those the Fed requires
What is the current required reserve ratio?
10%
What is the discount rate?
the interest rate a bank pays when it borrows from the Fed
What is the Federal Funds Rate?
a free market rate at which banks lend to other banks
If the Fed lowers the interest rates by a point it means…(regarding money supply)
the money supply is increased until the Free Market Funds Rate falls by a point
Why does the Fed prefer open market operations?
- the Required Reserve Ratio can cause swings in lending and
- ambivalence of borrowing from Fed makes the Discount rate a weak tool
What is the formula for the eventual increase in money supply for $1000
$1000/.1 = 10000
How does money simplify exchange?
by giving a common unit of account
What does the value of a dollar in the domestic economy depend on?
how many and which goods and services it will buy
What is the CPI?
Consumer Price Index
What is the CPI based on?
a weighted average of prices- weighted by the amounts of the goods consumers purchase
What does the PCE price index exclude?
fuel and food
How does the CPI measure prices?
comparing the cost of a market basket at a period of time to the cost of the same market in some “base year”
How do you find the Price Index?
PI= (cost of market basket in period of interest) / (cost of market basket in base period) x 100
How do you calculate inflation?
Inflation year 1 to year 2 = (CPI year 2 - CPI year 1) / CPI year 1
What is nominal income?
the number on the paycheck
What is real income?
how much stuff you can buy
What is the inflation rate?
% change in the price index
