Chapter 6 Flashcards
What is money?
anything that is generally acceptable in making exchanges
What is barter?
trade without money
To exchange with barter, there must be?
double coincidence of wants
Why did money develop?
because it was superior to barter
Smith lists the commodities that evolved into money:
1) labor (the original medium of exchange)
2) cattle (early societies)
3) salt (early societies, including Rome)
4) cowry shells (India)
5) cod (Newfoundland)
6) Tobacco (early Virginia)
7) sugar (west indies)
8) iron (sparta)
9) copper (rome)
10) gold & silver (many societies throughout history)
What are the three functions of money?
1) medium of exchange
2) unit of account
3) store of value
What is the medium of exchange?
means that something is generally accepted and convenient for exchange
What is unit of account?
each unit of it is “worth” the same amount
What is the store of value?
something retains value over time
What is the wellspring of all U.S. dollars?
The Federal Reserve System and the banking system
What is liquidity?
the ease in which an asset can be converted to spendable form
What is the most referenced measurement of our money supply?
M1 (M one) which most of us think as money
What is M1 the sum of?
1) paper currency held outside of the banks
2) checking account balances
3) Travelers checks (nearly obsolete)
What is our total income received in our economy?
$17.3 trillion
When and why was the federal reserve set up?
1913 to be a leader and last resort to troubled banks
What caused the great depression according many philosophers?
once the state came under control of banks to prevent future crisis they caused a huge economic deflation
Who does the fed depend on?
The fed depends on themselves, no one else, even congress. It was intended to be a government business partnership with shared governance
How many region district are there?
12
Who makes up the board of governors?
- 7 governors appointed by the president with the advice and consent of the senate who serve 14 year terms
- A chairman who is appointed by the president every 4 years who must also face confirmation from the senate
What is monetary policy?
The way that the fed uses the money supply to attempt to affect the economy
What is the Federal Open Market Committee composed of:
1) The board of governors (7 members)
2) The president of the New York Federal Reserve Bank
3) The president of the other 11 district banks, four of whom vote at each meeting on a rotating basis
(voting against the chairman is looked down upon, so it rarely happens)
What are the three tools of monetary policy?
1) Open Market Operations
2) The Required Reserve Ratio (A bank’s reserve, excess reserves)
3) The discount Rate
What is the open market operations?
buying and selling U.S. government bonds from individuals and businesses who previously bought them from the U.S. government (increases the money supply)
What is the required reserve ratio?
set by the fed, it is the percentage of deposits that banks can not lend out, but have to reserve
