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ECO2013 > Chapter 27 and 28 > Flashcards

Chapter 27 and 28 Flashcards

1
Q

The three functions of money are

A

Medium of exchange
Store of value
Unit of account

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2
Q

Medium of exchange

A

use item to buy goods and services; an object that is generally accepted in return for goods and services.

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3
Q

Store of value

A

use item to transfer purchasing power to the future; any commodity or token that can be held and exchanged later for goods and services.

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4
Q

Unit of account

A

use item to denote prices and debts

an agreed-upon measure for stating the prices of goods and services.

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5
Q

Money in the world today is called

A

fiat money.

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6
Q

Fiat Money

A

objects that are money because the law decrees or orders them to be money.

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7
Q

The objects that we use as money today are

A

Currency; Deposits at banks and other financial institutions

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8
Q

The notes (dollar bills) and coins that we use in the United States today are known as _

A

currency

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9
Q

Notes are money because

A

the government declares them to be with the words printed on every dollar bill.

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10
Q

The words printed on every dollar bill:

A

This note is legal tender for all debts, public and private

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11
Q

Deposits at ___ are also money.

A

banks, credit unions, savings banks, and savings and loan associations

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12
Q

Deposits are money because they

A

can be converted into currency on demand and are used directly to make payments.

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13
Q

Quantity of money demanded is

A

the amount of money that households and firms choose to hold.

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14
Q

Benefit of Holding Money

A

The benefit of holding money is the ability to make payments; the more money you hold, the easier it is for you to make payments.

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15
Q

The opportunity cost of holding money is

A

the interest forgone on an alternative asset.

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16
Q

the opportunity cost of holding money is the nominal interest because

A

it is the sum of the real interest rate on an alternative asset plus the expected inflation rate, which is the rate at which money loses buying power.

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17
Q

We hold money for two reasons

A

Transaction Demand, Asset Demand

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18
Q

Transaction Demand

A

Holding money in our bank account so we can buy stuff.

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19
Q

Asset Demand

A

Liquidity preference in which money is kept as a store of value for later use.

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20
Q

A change in the nominal interest rate brings a

A

change in the quantity of money demanded.

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21
Q

A change in any other influence on money holdings changes __

A

the demand for money.

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22
Q

The three main influences are

A

The price level; Real GDP; Financial technology

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23
Q

The price level

A

need more money to pay for goods and services

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24
Q

Real GDP

A

increases in expenditures and incomes

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25
Q

Financial technology

A

credit cards

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26
Q

An x percent rise in the price level brings ___ because ______

A

An x percent rise in the price level brings an x percent increase in the quantity of money that people plan to hold because the number of dollars we need to make payments is proportional to the price level.

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27
Q

The demand for money increases as __ because ___

A

The demand for money increases as real GDP increases because expenditures and incomes increase when real GDP increases.

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28
Q

Daily interest on ____ transfers between ___ have increased the marginal benefit of money and increased the demand for money.

A

Daily interest on checking deposits, automatic transfers between checking and savings accounts, automatic teller machines, debit cards, and smart cards have increased the marginal benefit of money and increased the demand for money.

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29
Q

__ have made it easier to buy goods and services on credit and have decreased the demand for money.

A

Credit cards

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30
Q

The supply of money is the relationship between the

A

quantity of money supplied and the nominal interest rate.

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31
Q

The quantity of money supplied is determined by the

A

actions of the banking system and the Fed.

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32
Q

On any given day, the quantity of money is

A

fixed independent of the interest rate.

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33
Q

The nominal interest rate adjusts to make

A

the quantity of money demanded equal the quantity of money supplied.

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34
Q

On a given day, the price level, real GDP, and state of financial technology is

A

fixed, so the demand for money is given.

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35
Q

The Federal Reserve System

A

the central bank of the United States.

36
Q

A central bank

A

A public authority that provides banking services to banks and regulates financial institutions and markets.

37
Q

The Fed’s main task is to

A

regulate the interest rate and quantity of money to achieve low and predictable inflation and sustained economic growth.

38
Q

The Chairman of the Board of Governors

A

The chairman is the Fed’s chief executive, public face, and center of power and responsibility. The current chairman is Jerome Powell.

39
Q

The key elements in the structure of the Federal Reserve are

A

The Chairman of the Board of Governors
The Board of Governors
The Regional Federal Reserve Banks
The Federal Open Market Committee

40
Q

The Board of Governors

A

Seven members, appointed by the President of the United States and confirmed by the Senate.
Each for a 14-year term.
The President appoints one of the board members as Chairman for a term of 4 years, which is renewable.

41
Q

The Regional Federal Reserve Banks

A

There are 12 Federal Reserve banks, one for each of 12 Federal Reserve districts.
Each Federal Reserve Bank has nine directors, three of whom are appointed by the Board of Governors and six of whom are elected by the commercial banks in the Federal Reserve district.
The Federal Reserve Bank of New York implements some of the Fed’s most important policy decisions.

42
Q

The Federal Open Market Committee

A

(FOMC) is the Fed’s main policy-making committee.
The FOMC consists of
The chairman and other six members of the Board of Governors.
The president of the Federal Reserve Bank of New York.
Four presidents of the other regional Federal Reserve banks (on a yearly rotating basis).
The FOMC meets approximately every six weeks.

43
Q

The FED uses three main policy tools

A

Required reserve ratios
Discount rate
Open market operations

44
Q

Required reserve ratios

A

Banks hold reserves.

Banks and thrifts are required to hold a minimum percentage of deposits as reserves, a required reserve ratio.

45
Q

Banks hold reserves

A

Currency in the institutions’ vaults and ATMs

Deposits held with other banks or with the Fed

46
Q

Discount rate

A

The interest rate at which the Fed stands ready to lend reserves to commercial banks.

47
Q

A change in the discount rate begins with

A

a proposal to the FOMC by at least one of the 12 Federal Reserve banks

48
Q

If the FOMC agrees that a change is required, it proposes the change to

A

The Board of Governors for its approval.

49
Q

open market operation

A

The purchase or sale of government securities—U.S. Treasury bills and bonds—by the New York Fed in the open market.

50
Q

When the New York Fed conducts an open market operation, the New York Fed

A

does not transact with the federal government.

51
Q

The Fed’s normal policy tools work by

A

changing either the demand for or the supply of monetary base, which in turn changes the interest rate.

52
Q

By increasing the required reserve ratio,

A

the Fed can force banks to hold a larger quantity of monetary base.

53
Q

By raising the discount rate,

A

the Fed can make it more costly for the banks to borrow reserves—borrow monetary base.

54
Q

By selling securities in the open market,

A

the Fed can decrease the monetary base.

55
Q

By decreasing the required reserve ratio,

A

the Fed can permit the banks to hold a smaller quantity of monetary base.

56
Q

By lowering the discount rate,

A

the Fed can make it less costly for the banks to borrow monetary base.

57
Q

By buying securities in the open market,

A

the Fed can increase the monetary base.

58
Q

If the Fed increases the quantity of money and the supply of money curve shifts to MS1,

A

the interest rate falls to 4 percent a year.

59
Q

If the Fed decreases the quantity of money and the supply of money curve shifts to MS2,

A

the interest rate rises to 6 percent a year.

60
Q

Following the collapse of Lehman Brothers, the Fed (working closely with the U.S. Treasury Department) took a number of major policy moves that created new policy tools:

A

Quantitative easing
Credit easing
Operation Twist

61
Q

Quantitative Easing

A

When the Fed creates bank reserves by conducting a large-scale open market purchase at a low or possibly zero federal funds rate

62
Q

Quantitative Easing differs from ____ and it might require the Fed to ____

A

a normal open market purchase in its scale; buy any of a number of private securities rather than government securities.

63
Q

When the Fed buys private securities or makes loans to financial institutions to stimulate their lending,

A

the action is called credit easing.

64
Q

When the Fed buys long-term government securities and sells short-term government securities, _____, aiming to _____

A

the action is called operation twist; to lower long-term interest rates and stimulate borrowing and investment.

65
Q

The long run

A

refers to the economy at full employment or when we smooth out the effects of the business cycle.

66
Q

In the short run

A

the interest rate adjusts to make the quantity of money demanded equal the quantity of money supplied.

67
Q

In the long run,

A

the price level does the adjusting.

68
Q

The lower the “price” of money,

A

the greater is the quantity of money that people are willing to hold.

69
Q

The “price” of money is the

A

value of money.

70
Q

The value of money

A

the quantity of goods and services that a unit of money will buy.

71
Q

Value of Money

A

It is the inverse of the price level, P, which equals the GDP price index divided by 100.
Value of money = 1/P.

72
Q

The long-run demand for money is determined by

A

potential GDP and the equilibrium interest rate.

73
Q

The MS curve shows

A

the quantity of money supplied

74
Q

The price level adjusts to make the value of money equal _ and achieve __

A

1 and achieve long-run money market equilibrium.

75
Q

Inflation is costly for four reasons

A

Tax costs
Shoe-leather costs
Confusion costs
Uncertainty costs

76
Q

The income tax on nominal interest income drives a wedge between

A

the before-tax interest rate paid by borrowers and the after-tax interest rate received by lenders.

77
Q

The fall in the after-tax interest rate weakens the

A

incentive to save and lend.

78
Q

The rise in the before-tax interest rate weakens the

A

incentive to borrow and invest.

79
Q

Inflation increases the ___, and because income taxes are paid on ___, the true income tax rate rises with _____.

A

nominal interest rate; nominal interest income; inflation.

80
Q

When money loses value at a rapid anticipated rate,

A

it does not function well as a store of value and people try to avoid holding it.

81
Q

When money loses costsvalue at a rapid anticipated rate, people spend their incomes _____, and firms pay out incomes—wages and dividends—_____

A

as soon as they receive them; as soon as they receive revenue from their sales.

82
Q

Borrowers and lenders, workers and employers, all make agreements in terms of __

A

Money

83
Q

Inflation makes the value of __ change, so it changes ___.

A

money; so it changes the units on our measuring rod.

84
Q

__ is our measuring rod of value.

A

Money

85
Q

Uncertainty Costs

A

A high inflation rate brings increased uncertainty about the long-term inflation rate; Increased uncertainty also misallocates resources; Instead of concentrating on the activities at which they have a comparative advantage, people find it more profitable to search for ways of avoiding the losses that inflation inflicts; Gains and losses occur because of unpredictable changes in the value of money.

ECO2013 (12 decks)

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