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ECON 5311: Foundations in Economics > Chapter 9: Money > Flashcards

Chapter 9: Money Flashcards

1
Q

money

A

any item that both buyers and sellers will generally accept in exchange for goods and services

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2
Q

medium of exchange

A

any item used to facilitate trade between buyers and sellers; one of the functions of money

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3
Q

unit of account

A

a measurement unit that allows buyers and sellers to easily compare the value of different goods, services, and resources; one of the functions of money

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4
Q

store of value

A

a characteristic of certain assets that enables them to transfer wealth from the present into the future; one of the functions of money

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5
Q

what are the 3 functions of money?

A
  1. medium of exchange 2. unit of account 3. store of value
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6
Q

liquidity

A

the degree to which an asset can be readily converted into currency

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7
Q

currency

A

physical units of money such as cash and coins

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8
Q

demand deposits

A

money held in an account that can be converted to currency on demand (AKA checking account balances, checkable deposits)

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9
Q

traveler’s check

A

a certificate, or check that can be converted to currency

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10
Q

M1

A

the most liquid measure of money supply (i.e. demand deposits, traveler’s checks, currency, and other checkable deposits)

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11
Q

M2

A

a broader measure of money supply that includes M1 (i.e. savings deposits, small-denomination time deposits, money market mutual funds)

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12
Q

time deposit

A

money held in an account that cannot be converted to currency without penalty before a specified time

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13
Q

money market mutual fund

A

a demand deposit that accepts deposits and purchases short-term bonds and commercial debt in order to pay interest on the deposited funds

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14
Q

equation of exchange

A

M (money supply) x V (Velocity) = P (Price Level) x Y(Real GDP)

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15
Q

nominal variables

A

variables measured in monetary units or prices

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16
Q

real variables

A

variables measured in numerical units or units of output

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17
Q

classical dichotomy

A

the idea that real variable such as employment and output are independent from nominal variables like money

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18
Q

velocity of money

A

the number of times on average and in a given time period that each dollar in a nation’s money supply is used to make purchases

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19
Q

nominal expenditures

A

P(price level) x Y(real GDP)

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20
Q

real expenditures

A

M(money supply) x V(velocity)

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21
Q

Federal Reserve System

A

the central bank of the US, consisting of 12 regional banks and the Board of Governors

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22
Q

What does The Fed do? (functions)

A
  1. conduct monetary policy
  2. supervises and regulates banks
  3. provides financial services to the US government
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23
Q

Federal Reserve Board / Board of Governors

A
  1. the governing organization of The Fed
  2. members appointed by the US president and confirmed by the Senate
  3. serve 14 years
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24
Q

Federal Open Market Committee (FOMC)

A
  1. a committee of The Fed that is responsible for monetary policy decisions specifically for open market operations for The Fed
  2. Federal Reserve board + president of the NY Fed + 4 of the 11 other regional presidents
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25
Q

central bank

A

a bank that provides financial services to a country’s government and is responsible for the nation’s monetary policy (for the US it’s The Fed)

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26
Q

monetary policy

A

the actions taken by a country’s central bank to influence the supply of money and credit in the economy

27
Q

open market operations

A

the purchase or sale of government securities by a central bank; used to influence the money supply and interest rates

28
Q

discount rate

A

interest rate at which banks can borrow money directly from the Federal Reserve

29
Q

reserve requirement (rr)

A

the fraction of checkable deposits that banks must keep on hand as reserves either as currency or on deposit with Federal Reserve

30
Q

monetary policy tools

A
  1. open market operations
  2. discount rate
  3. reserve requirement
31
Q

excess reserves

A

amount of reserves that a bank can lend out to earn interest;
= total reserves - required reserves

32
Q

required reserves

A

amount of reserves that a bank must keep on hand to meet regulatory requirements
= deposits x rr(reserve requirement)

33
Q

total reserves

A

total amount of reserves that a bank has;

= required reserves + excess reserves

34
Q

asset

A

any item of value that is owned by an individual or corporation

35
Q

liability

A

a monetary debt or obligation

36
Q

balance sheet

A

a statement of assets, liabilities, and net worth

37
Q

fractional reserve banking

A

a banking system in which banks have to keep only a fraction of checkable deposit on hand and available for withdrawal

38
Q

money mulitplier

A

the amount by which $1 change in reserves will change the money supply
=1/rr

39
Q

change in money supply

A

1 / rr x changes in reserves

40
Q

interest

A

a fee for the use of money over time; payment made to lender

41
Q

interest rate

A

payment made to agents that lend or save money expressed as an annual percentage of monetary amount lent or saved (AKA price of money; nominal interest rate); PRICE OF MONEY

42
Q

money market

A

a market in which the demand for and supply of money determine an interest rate or opportunity cost of holding money balances

43
Q

transaction demand

A

the demand for money to be used in daily transactions

44
Q

asset demand

A

the demand for money to be saved for future use

45
Q

money demand

A

the relationship between the interest rate and the quantity of money demanded all else held constant; the sum of the transaction demand and asset demand for money

46
Q

money supply

A

the relationship between the interest rate and the quantity of money supplied in an economy; usually a given value; in the US, M=M2

47
Q

money supply curve

A

a graphical representation of money supply

48
Q

surplus

A

quantity supplied is greater than quantity demanded

49
Q

shortage

A

quantity demanded is greater than quantity supplied

50
Q

determinants of money demand

A

transaction demand

asset demand

51
Q

determinants for money supply

A

changes in rr
changes in excess reserves
changes in willingness to lend

52
Q

yield

A

the effective interest rate earned on a bond or another asset
yield = net profit earned / amount invested

53
Q

bond

A

a financial agreement that obligates a borrower to repay the amount borrowed and interest on a specific date in the future

54
Q

bond market

A

financial market in which participants can buy and sell new bounds or trade bonds already in circulation

55
Q

supply of bonds

A

the relationship between the interest rate and the quantity of bonds supplied in an economy all else held constant

56
Q

demand for bonds

A

the relationship between the interest rate and the quantity of bonds demanded in an economy all else held constant

57
Q

face value

A

nominal or dollar value of a security; generally printed on the face of the security; for bonds it’s the amount paid to the bondholder when repaid

58
Q

coupon rate

A

interest rate stated on a bond, as a percentage of the bond’s face value

59
Q

bond yield

A

interest payment / bond cost

60
Q

real interest rate

A

interest rate paid to lenders and savers when the expected rate of inflation equals zero

61
Q

expected inflation

A

rate of inflation anticipated by market participants (phi^e)

62
Q

fisher equation

A

w/out inflation
i (nominal interest rate) = r (real interest rate)
w/inflation
i = r + expected inflation

63
Q

A bond specifies the following terms:

A
  1. length/term of maturity 2. interest paid/interest rate/coupon rate 3. face value/dollar amount returned at expiration

ECON 5311: Foundations in Economics (11 decks)

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