Chapter 31 Test Flashcards
How is money a medium of exchange?
It’s a convenient way to exchange for goods and services
How is money a unit of measurement?
It is used to measure worth
How is money a store of value?
Money doesn’t depreciate relatively over time
What does it mean to be a medium of exchange?
accepted for goods and services
Portable
Divisible
Each unit has the same value(uniform)
How is M1 money defined?
Coins, currency, checkable deposits
What are checkable deposits?
Checks and debit cards
What are the functions of money?
It’s a medium of exchange, a unit of measurement, and a store of value
What are near monies?
Things that can be converted to money but aren’t money in that state;assets that aren’t cash
What are some examples of near monies?
Gold, savings accounts, etc.
Why are near monies important?
The more near money one has the more willing they are to spend their income, converting near money to M1 money could cause inflation, and it can affect monetary policy
What backs our currency?
Nothing; just the trust that the government accepts it
What is fiat money?
Dollars are accepted as money because the government declared them money and they are accepted by the government
How do you calculate the value or the dollar?
1/price level
Hey does inflation of money occur?
Society spends beyond its capacity to produce
What could cause money to lose its function as a medium of exchange?
A rapid loss of purchasing power
What could cause money to lose its ability to function as a store of value?
If storing money would guarantee losses
What keeps money stable in the US?
Legislation, government policy, and social practice keeps the money supply stable
What is the main backing of money’s stability?
The governments ability to keep the value stable
What is transaction demand??
It’s demand for money to buy goods/ services
Transaction demand varies directly with??
GDP
Transaction demand is independent of??
Interest rates
As GDP goes up,
Transaction demand goes up
As GDP goes down,
Transaction demand goes down
What is asset demand?
People’s tendency to invest their money
Asset demand varies ______ with interest rates
Inversely
How do people decide to invest money regarding asset demand???
Opportunity cost
If there are high interest rates to invest people will
Invest their money and have less cash(they will make more money by keeping it in the bank)
If interest rates of investing are low people will
Have more cash and invest less(they aren’t making money by investing so they will keep their money for themselves)
What is total demand for money?
Transaction demand + asset demand
Why is money supply on the total demand graph a vertical line?
The federal reserve gives the economy a certain amount of money(it doesn’t change…relatively)
What happens when there is a shortage of money?
People try to get more money by selling bonds but in doing so are only transferring ownership not creating new money, this causes prices of bonds to lower because people are desperate for money, this in turn cussed higher interest rates, and as interest rates rise there is more opportunity costs of having cash so equilibrium is reached
What happens when there is a surplus of money?
People try to get rid of money by buying bonds for others, again this only transfers the money’s ownership it doesn’t get rid of it , this drive up bond prices and in turn lowers interest rates which causes equilibrium to be reached
On a monetary supply graph where is a surplus of money?
To the right of equilibrium and lower than equilibrium
On a monetary supply graph where is a shortage of money?
To the left of equilibrium and higher than equilibrium
What is the federal reserve act?
It created the federal reserve board, gave the US a central bank, and created 12 federal reserve banks
What was the purpose of creating the federal reserve act?
Servicing and coordinating commercial banks, and regulating the supply of the national money
Why do we have 12 federal reserve banks?
Congress was scared of giving one bank all the power, regional needs could be best served by having regional banks
How are the 7 members of the board of governors appointed??
The president appoints them and they are confirmed by the senate
How long do the board of governors serve?
14 year terms
Who is the chairman of the board of governors?
Janet Yellen
Who was the previous chairman on the board of governors??
Ben Bernanke
How many federal reserve banks are there?
12
Who owns the federal reserve?
All of the member banks
What are the 3 tools of the federal reserve?
The FOMC, the reserve ratio, and the discount rate
What is the FOMC?
The federal open market committee
What is the FOMC’s responsibility?
Formulating policy to promote economic growth, full employment, stable prices, and international trade
What are the 7 functions of the federal reserve?
Issue currency, set reserve requirements, lend money to banks and thrifts, provide for check collection, act as a fiscal agent, supervise banks, and control the money supply
What is the federal funds market?
Overnight lending between banks
What are the pros of having an independent FED?
It’s free from political influence, it’s takes away monetary pressure from the government, few people understand that high interest rates are needed to control inflation
What are the cons of having an independent FED?
It’s undemocratic, voters blame the gov, often times its policies conflict with congressional fiscal policy, legislative and educative branches try to promote economic growth without the tools to do anything about them
What is a fractional banking system?
It legally forces financial institutions to hold less than 100% of their deposits as currency
What is our current banking system?
Fractional banking
What can banks do?
Create money
What can banks not do?
Set reserve requirements
Banks work on the confidence that….
Not everyone will try to take out all of their money at one time
