Chapter 6 Flashcards
Price Index Formula
PI=(cost of market basket in focal period)/(Cost of market basket in base period) x 100
Inflation
Inflation= (PI year 2 / PI year 1) - 1
Adjusting Data for Price Change
EQUIVALENT INCOME new = CPI new / CPI old x INCOME old
Nominal Income
number on a paycheck
Real Income
expresses nominal income in terms of base period prices
Double Coincidence of Wants
two goods to be exchanged having equal value
in barter, the problem of finding someone who wants what you have and has what you want
Functions of Money
Medium of Exchange
Store of Value
Unit of Account
Commodity Money
Money that has other uses
Fiat Money
Money that does not have any other uses
Liquidity
The ease with which an asset can be converted into a spendable form.
M1
How much money is in the economy
3 PARTS OF M1
- Paper Currency held outside banks
- Checking Account Balances
- Traveler’s Checks
How big is M1
2.9 Trillion
Monetary Policy
the Fed using money supply to attempt to affect the economy
Federal Open Market Commitee
Conducts Monetary Policy
7 governors
the NY Fed President
11 other district bank presidents, 4 of whom vote on a rotating basis.
3 Tools of Monetary Policy
Open Market Operations
Required Reserve Ratio
Discount Rate
Open Market Operations
Buying and Selling of US government bonds
Required Reserve Ratio
Percentage of Deposits that a bank cant lend, but must hold as reserve
Discount Rate
interest rate paid when a bank borrows from the Fed
Federal Funds Rate
Free market rate at which banks lend to other banks
Consumer Price Index
Weighted average of prices
PCE Price Index
Price Index excluding food and fuel
Excess reserves
reserves that banks hold outside of Fed requirements
