chapter 6 Flashcards
What is money?
anything that is generally acceptable in making exchanges
double coincidence of wants
with barter, one must find someone who both has what he wants ans wants what he has
how does money evolve from barter?
eventually, in barter, some goods become more acceptable in making exchanges
functions of money
Medium of Exchange. Unit of account. Store of value.
what is the wellspring of all US dollars?
The Federal Reserve and the banking system
Commodity money
money that may have other uses i.e. labor, cattle, salt, etc.
fiat money
money that has no other use
liquidity
the ease with which an asset can be converted to spendable form
M1
the sum of paper currency held outside banks, checking account balances, and traveler’s checks. $3 trillion dollars now.
Why was the Fed created?
Created in 1913 to stabilize the banking system through being a lender of last resort to troubled banks and prevent banking crises. Now creates every US dollar in existence.
How is the Fed financed?
it finances itself
Who runs the Fed?
The Board of 7 governors are appointed by the President for 14 year terms. The Chair of the Fed is a 4 year term. and they are confirmed by the Senate
What was the Fed’s early record like?
not good. they caused huge deflation that resulted in the Great Depression
What are the 3 tools of monetary policy?
Open Market operations. The required reserve ratio. Discount rate
What does the Federal Open Market Committee do and who is the Committee made up of?
It conducts monetary policy. It is composed of the Board of Governors (7 members), The President of the New York Federal Reserve Bank, and the Presidents of the other 11 district banks, 4 of which vote at each meeting on a rotating basis.
Open Market Operations
Buying and selling US government bonds to affect the money supply. When the Fed buys bonds, they are putting money IN to the economy. When the Fed sells bonds, they are pulling money OUT of the economy.
What is the required reserve ratio?
The percentage of deposits that a bank cannot lend, but must hold as reserves. The current reserve ratio is 10%. With a lower required reserve ratio, banks can lend more.
What happens to the money supply if the Fed lowers the required reserve ratio?
It will increase because the bank can lend more money, which moves money from their reserves, which are not part of the money supply, into currency and individual accounts, which are part of the money supply
In what 2 forms can a bank hold reserves?
As vault cash and in their account with the Fed
Discount Rate
The interest rate at which a bank can borrow from the Fed
Federal Funds Rate
A free market rate at which banks lend to each other
Which of its three tools of monetary policy does the Fed prefer? Why? -
Open Market Operations–the required reserve ratio is dangerous and the discount rate is weak
What determines the value of the dollar in the domestic economy?
depends on how many and which goods and services the dollar with buy.
What is the formula for a price index?
PI = (cost of market basket in the period of interest)/(cost of the market basket in the base period) *100
The price index for a particular year is 200. What is the most straightforward interpretation of that number?
If $100 bought $100 worth of stuff in the base year, it now takes $200 to buy that same stuff.
What is the definition of the inflation rate?
The percent change in the price index, usually over one year.
equivalent income formula
CPI(new)/CPI(old) * Income(old)
