Chapter 6: Money and Prices Flashcards
Money
is anything that is generally acceptable in making exchanges
Barter
trading without the use of widely accepted means of exchange
double coincidence of wants
to buy gas the pizza maker must find a gas station owner who wants lots of pizza
functions of money
- Medium of exchange–generally acceptable and convenient in exchange
- Unit of account–each unit of money is “worth” the same amount
- Store of value–holds value over time
commodity money
ask in class
fiat money
ask in class
Liquidity
the ease with which an asset can be converted to spendable form
monetary policy
the Fed uses the money supply to attempt to affect the economy.
Federal Open Market Committee
- The Board of Governors (7)
- The President of the New York Federal Reserve Bank
- The Presidents of the other eleven district banks, four of which vote at each meeting on a rotating basis
three tools of monetary policy
Open Market Operations
The Required Reserve Ratio
The Discount Rate
Open Market Operations
buying and selling U. S. government bonds from individuals and businesses who previously bought them from the U. S. government.
o When the Fed buys bonds, bonds flow into the Fed and money flows into the economy, increasing the money supply.
o And vice versa.
The Required Reserve Ratio
the Fed sets the required reserve ratio, which is the percentage of deposits that banks cannot lend out, but must hold as reserves.
The Discount Rate
the Fed was created to be a lender of last resort. That is, they are the final stop that a bank makes for an emergency loan before it fails. When a bank borrows from the Fed, it pays an interest rate called the discount rate which the Fed sets by command.
Federal Funds Rate
which is a free market rate at which banks lend to other banks
Consumer Price Index (CPI)
The measurement is a weighted average of the prices–weighted by the amounts of the goods that consumers purchase
