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Macro Last Unit > Chapter 11- The Monetary System > Flashcards

Chapter 11- The Monetary System Flashcards

1
Q

Medium of Exchange

A

An asset that can be traded for goods and services.

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2
Q

Money

A

An asset that people use to make and receive payment when buying and selling goods and services.

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3
Q

What 3 functions does money serve?

A
  • A medium of exchange
  • A store of value
  • A unit of account
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4
Q

Store of value

A

An asset that enables people to transfer purchasing power into the future

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5
Q

Unit of account

A

A universal yardstick that is used to express relative prices of goods and services

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6
Q

Fiat Money

A

An asset that is used as legal tender by government decree and is not backed by a physical commodity like gold.

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7
Q

The money supply (M2)

A

The sum of currency in circulation, checking accounts and other types of accounts.

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8
Q

Monetary measure is calculated by

A

Currency in circulation/GDP and Money Supply/GDP

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9
Q

Nominal GDP

A

The total value of production using the prices from the same year .

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10
Q

Real GDP

A

The total value of production using fixed prices taken from a particular base year.

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11
Q

Quantity Theory of Money

A

Money Supply/ Nominal GDP = Constant

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12
Q

A constant ratio is a good approximation of how an economy

A

Behave in the long run

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13
Q

The growth rate of money supply= growth rate of nominal GDP is the same as

A

Growth rate of money supply = inflation rate + growth rate of real GDP

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14
Q

Growth rate of money supply =

A

Inflation rate + Growth rate of real GDP

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15
Q

Inflation rate=

A

Growth rate of money supply- growth rate of real GDP

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16
Q

When does long term inflation occur?

A

When there is a positive gap between growth in money supply and real GDP

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17
Q

Inflation

A

A situation of rising prices

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18
Q

Deflation

A

A situation of falling prices (negative inflation)

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19
Q

Hyperinflation

A

A situation of extreme inflation where prices double within three years.

20
Q

Do all wages and prices move together during inflation?

A

No

21
Q

Relative prices

A

Wages compared to the price of a good .

22
Q

Who wins from unexpected inflation ?

A

Borrowers

23
Q

Who loses from unexpected inflation?

A

Savers and Lenders

24
Q

Banks receiving payments on a mortgage of fixed interest or a retiree receiving a pension

A

All lose during an inflation.

25
Q

What does the central bank do ?

A

Monitor Financial institutions

  • control certain key interest rates
  • indirectly controls the money supply
26
Q

What activities encompass the central bank?

A

Monetary Policy

27
Q

What is the Federal Reserve Bank?

A

The central bank of the United States

28
Q

What parts are the fed composed of?

A

12 District banks throughout the country
7 Board of governors
12 Federal open market committee

29
Q

What does the central bank do ?

A

Influences short term interest rates
Influences Money Supply
Influences Long Term Real interest rates

30
Q

What are bank reserves?

A

The combination of deposits that private banks hold at the central bank and cash in their vaults which provide liquidity to private banks.

31
Q

Liquidity

A

The funds and assets that can be used immediately to conduct transactions.

32
Q

Federal Funds Market

A

The market where banks borrow and lend reserve to one another

33
Q

Federal Funds Rate

A

The 24hour interest rate charged in the market

34
Q

Demand curve for reserves

A

This curve plots the total quantity of reserves demanded by private banks for each level of the federal funds rate.

35
Q

Why does the demand curve for reserves slope downward?

A

Because optimizing banks choose to hold more reserves as the cost of those reserves.

36
Q

When does the demand curve for bank reserves shift?

A 
When there is 
Economic Expansion
Changing deposit base
Changing reserve requirement
Changing interest paid by the fed for deposits at the fed
37
Q

An economic contraction decrease bank lending. What happens to the curve?

A

The curve moves to the left because they are not to lend as much money .

38
Q

What is supply curve for reserves?

A

Plots the quantity of reserves supplied by the federal reserve via market operations.

39
Q

Open Market Purchase

A

Where the fed buys government bonds from private banks and in return give the private banks more reserves.

40
Q

Open Market Sale

A

The fed sells the government bonds to private banks and in return the private banks give some of their reserves.

41
Q

What does the supply curve for reserves plot?

A

The quantity of reserves supplied by the federal reserve.

42
Q

Which way do the supply curve for reserves go ?

A

It goes vertical because the federal reserves supplies reserves not to earn economic profits .

43
Q

Can the federal reserve control either the quantity of reserves or the federal funds rate ?

A

NEEEOOOPPPEEE..

44
Q

How can the fed shift demand curve for reserves?

A

By changing the reserve requirement and by changing interest paid on reserves

45
Q

How can the fed shift supply curve reserves?

A

By using open market operations

46
Q

What happens when the fed manipulates the nominal interest rate?

A

It affects rates charged by banks on loans therefore rectifying the point that the fed is in direct control over the nominal interest rates.

47
Q

How does the fed influence long term interest rates?

A

Long term loans are the same as lots of short run loan so when you change the short tem interest rate it will also affect the long term interest rate (at a smaller amount)

Macro Last Unit (3 decks)

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