Chappter 6: Money & Monetary Policy Flashcards
is anything generally accepted as a means of paying for goods and services and for paying off debts.
Money
True or False
For something to serve successfully as money, it must be easily divisible so that exchanges can take place in small or large quantities, relatively inexpensive to store and transfer, and reasonably stable in value over time.
True
True or False
Money is more convenient than the barter.
True
Goods trade for goods.; Necessary to find someone who not only has what you want, but also wants what you have.
Barter Exchange
True or False
money has become the unit of account in which prices of goods and services are expressed.
True
- Money will always be accepted as payment.
- Money is always on one side of the transaction.
- People with money only need to find someone who has and want to trade what they
want.
Monetary Exhange
whose value comes from the commodity from which it is made.
Commodity money
commodity-backed money.
Representative money
whose value comes from the relationship between supply and demand and the stability of the issuing government.
Fiat money
True or False
What form money takes has varied by region and historical period.
True
Around 1450 in Europe, _______, _______, & ________ coins were used as money.
gold, silver, and copper
the earliest known civilization to use gold coins was the old ____________.
Roman Empire.
True or False
The problem with commodity money is that it restricts the capability of governments to finance wars and other public expenditures.
True
True or False
Gold and silver commodities are just scarce, thus their precious value. This problem led to the invention of the first “representative money”. Rather than paying the armies in gold, the ancient kings and emperors decided to pay soldiers by issuing pieces of paper that were promises to deliver gold on request.
True
Use of paper money began around __________ in Europe when goldsmiths in London issued notes exchanged for gold.
1660
where banks hold only a fraction of their total deposits their reserve deposits in gold coins in that era of gold standard.
fractional reserve banking
are coins with metal contents worth less than the monetary value of the coins.
Token coins
is paper money issued by governments not redeemable in fixed amounts of gold or silver commodities, but has value by government fiat (i.e., the government declares them as legal tender).
Fiat money
The Three Basic Functions of Money
- Serving as a medium of exchange
- A store of value
- A standard of value
True or False
In the barter exchange period, tables of relative values were developed from experience. Such as the number of furs, measures of grain, or amount of cloth agreed to equal one cow.
True
is the amount of goods and services that can be purchased with a unit of money.
Purchasing power
money may be spent immediately after receipt or held over time.
store of value
the need for simpler means of exchange invented money, with its relatively low storage and transfer costs as a _____________-.
medium of exchange
True or False
Money can perform its function as a store of value only if its purchasing power is relatively stable over time.
True
reduces the purchasing power of money, that is the increase of prices of goods and services not off set by increases in quantity or quality.
Inflation
reduce the need for holding money itself as a store of value.
Liquid assets
Money as a ______________ means that prices and contracts for deferred payments are expressed in terms of a monetary unit
standard of value
is measured by “counting” the money supply in the financial system as of a point in time, this can also be viewed as the amount of money stock on a particular date.
Money Supply or stock
meaning they had metal content equal to their monetary value.
Full bodied coins
In that period, few countries used paper money and China in fact stopped using paper money after _______________.
five hundred years
discovered that their paper notes circulated and only some returned for redemption in gold.
Goldsmiths
more paper notes could be issued than the gold to back them.
Representative commodity money
are just scarce, thus their precious value.
Gold and silver commodities
The problem with commodity money is that it _______________ of governments to finance wars and other public expenditures
restricts the capability
is a broader measure than M1 because it emphasizes money as a store of value in addition to its function as a medium of exchange.
M2 money supply
is defined by the U.S. Fed as the money supply consisting only of currency, traveler’s checks, demand deposits, and other checkable deposits at depository institutions.
M1 Money Supply
In general terms, the _______________ includes M1 plus highly liquid financial assets, including savings accounts, small time deposits, and retail money market mutual funds.
M2 money supply
True or False
Economists have observed that economic activity, money supply, and the price levels of goods and services generally move together over time.
True
True or False
Many economists believe that economic activity matters when they try to manage money supply.
False
(Many economists believe that money supply matters when they try to manage economic activity.)
is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.
Gross Domestic Product (GDP)
As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health.
Gross Domestic Product (GDP)
provides an economic snapshot of a country, used to estimate the size of an economy and growth rate.
Gross Domestic Product (GDP)
can be calculated in three ways, using expenditures, production, or incomes. It can be adjusted for inflation and population to provide deeper insights.
Gross Domestic Product (GDP)
____________ takes account the effects of inflation while ____________ does not.
Real GDP; nominal GDP
is a key tool to guide policymakers, investors, and
businesses in strategic decision-making.
Gross Domestic Product (GDP)
The expenditure approach, also known as the _______________,
spending approach
calculates spending by the different groups that participate in the economy.
expenditure approach
The U.S. GDP is primarily measured based on the ______________.
expenditure approach
Expenditure approach can be calculated using the following formula: _________________
GDP = C + G + I + NX
___ = private consumption expenditures or consumer spending;
C
___ = government consumption expenditure and gross investment;
G
__ = private domestic investment or capital expenditures; and
I
____ = net exports formula subtracts total imports from total exports (___ = Exports - Imports)
NX
measures the economic activity within the physical borders of a country (whether the producers are native to that country or foreign-owned entities).
GDP
measures the overall production of people or corporations native to a country, including those based abroad (excludes domestic production by foreigners).
GNP
Types of Monetary Policy
- Contractionary
- Expansionary
is the sum of all income earned by citizens or nationals of a country (regardless of whether the underlying economic activity takes place domestically or abroad).
GNI
increases interest rates and limits the outstanding money supply to slow growth and decrease inflation, where the prices of goods and services in an economy rise and reduce the purchasing power of money.
contractionary policy
During times of slowdown or a recession, an _________________ grows economic activity. By lowering interest rates, saving becomes less attractive, and consumer spending and borrowing increase.
expansionary policy
Goals of Monetary Policy
- Inflation
- Unemployment
- Exhange rates
An expansionary monetary policy decreases _____________ as a higher money supply and attractive interest rates stimulate business activities and expansion of the job market.
unemployment
The ______________ between domestic and foreign currencies can be affected by monetary policy. With an increase in the money supply, the domestic currency becomes cheaper than its foreign exchange.
exchange rates
Contractionary monetary policy is used to target a high level of _____________ and reduce the level of money circulating in the economy.
inflation
Tools of Monetary Policy
- Open market Operations
- Interest Rates
- reserve requirements
the central bank buys bonds from investors or sells additional bonds to investors to change the number of outstanding government securities and money available to the economy as a whole.
Open market Operations
The central bank may change the _______________ or the required collateral that it demands.
interest rates
Authorities can manipulate the _______________, the funds that banks must retain as a proportion of the deposits made by their customers to ensure that they can meet their liabilities.
reserve requirements
this rate is known as the discount rate. Banks will loan somewhat freely depending on this ____________.
interest rate
is enacted by a central bank to sustain a level economy and keep unemployment low, protect the value of the currency, and maintain economic growth
Monetary policy
is an additional tool used by governments and not central banks. While the central bank can influence the supply of money in the economy, the treasury department can create new money and implement new tax policies.
Fiscal Policy
