Econ 1040 final Flashcards
we say that money is a store of value because it represents
a certain amount of purchasing power held over time
what is extremely inefficient compared to using money
bartering
any form of money that can be legally exchanged into a fixed amount of an underlying commodity
commodity-backed money
the cash that a bank keeps in its vault is called its
reserves
the ratio of money created by the lending activities of the banking system to change in the banking reserves is called the
money multiplier
if the reserve ratio is 20 percent, then the money multiplier is approximated to be
5
your checking account balance would be counted in which measure of money?
it would be counted in both M1 and M2
the institution ultimately responsible for managing the nation’s money supply and coordinating the banking system to ensure a sound economy is called a
central bank
the regional Federal Reserve bank presidents are
are responsible for overseeing the day-to-day actions of the regional banks
the twin (dual) responsibilities of the Federal Reserve are
to ensure price stability and maintain full employment
Which of the following tools is used most often by the Fed for changing the supply of money?
open market operations
contractionary monetary policy involves actions that
reduce the money supply in order to decrease aggregate demand
when the economy experiences inflation, people are demanding a
higher quantity of money, shifting the money demand curve rightward
in the simple liquidity preference model, if the money demanded curve is elastic, then
small changes to the money supply will cause insignificant changes to the interest rate
if the money supply in the economy were at MS2, to engage in the contractionary policy the Federal Reserve Bank would us open market operation to move money supply to
MS1
if the money supply in the economy were at MS2, and the Federal Reserve Bank used open market operations to move money supply to MS1 the overall result in the economy would be
aggregate demand shifted in, causing GDP to fall
if money has intrinsic value, it has value
unrelated to its use as money
wide acceptance of money without intrinsic value comes largely from the fact that it
has a stable value
we know how many dollars banks create using the
money multiplier
cash, checking accounts, saving accounts and other financial instruments where money is locked away for a specified period of time is
the definition of M2
core inflation is a measure of
inflation that excludes goods with price changes
-allow us to convert nominal measures of output into real measures of output
-let us measure how much real stuff we get for our money
-like the CPI or GDP price deflator are used to measure the aggregate price level
price indexes
the neutrality of money is the idea that
aggregate price levels do not affect real outcomes in the economy
the relationship between money supply, output and the overall level of prices is illustrated by the
classical theory of inflation
the quantity theory of money relies on which variable to remain constant
velocity of money
if an economy produces 1,000 units of output with a price level of $1 and the money supply (M) is $500, the velocity is
2
if an economy produces 2,500 units of output with a money supply of $500 and a velocity of 10, we know the price level must be
$2
- describes a long-run equilibrium
- explains the direct relationship between money supply and the price level
- shows neutrality of money in the long run
the classical theory of inflation
one of the costs associated with predictable inflation is
tax distortions
when we consider our savings, interest rates _______ and inflation rates _______ the value
increase ; decrease
suppose the nominal interest rate is 7 percent annually, and you deposit $1,000. Inflation in the economy throughout the year is 7 percent. at the end of the year, you have earned
a decrease in your purchasing power
if the real rate of return is 2 percent, and the inflation rate is 2 percent, then the nominal interest rate must be
4 percent
unexpected high inflation redistributes wealth from
those who save to those who borrow
the net result of deflation is to
reduce the level of aggregate demand in the economy
disinflation is the term for a period during which overall inflation rates are
positive and failing
if inflation was zero percent, nominal interest rates would be
equal to real interest rate
when an economy is producing at its potential level of output
cyclical unemployment is not occurring
the idea that in the long run real economic variables (such as GDP, relative prices and real wages) are not influenced by nominal economic variables (such as money supply price level and inflation)
the neutrality of money
money is neutral in the _______ leaving real economic variables unchanged
long run
any equilibrium output level to the left of the full employment output Y represents
a recession
nominal interest rate=
real interest rate + inflation rate
money multiplier=
1/reserve ratio
inflation always _____ the demand for money, aka inflation causes the demand for money to shift to the _____
increases ; right
when demand for money is elastic, a small change in money supply will
have little to no effect
contractionary monetary policy means the Federal Reserve reduces the money supply. so,
the supply curve for money shifts to the left from MS2 to MS1
interest rates increase so
the AD curve decreases (shifts to the left), causing GDP to fall
China imports _____ from the U.S. compared to how many goods the U.S. imports from China
less
a main trading partner with the U.S. is
China
the value of exports minus the value of imports is called the
balance of trade
the type of good with the largest import in the U.S. is
consumer goods
ford opens a parts manufacturing plant in Haiti, which ships its parts back to the U.S. to be assembled in Detroit. Running the factory in Haiti is an example of
foreign direct investment
IBM buys treasury bonds from the UK as part of its investment portfolio. this is an example of
foreign portfolio investment
one reason the chinese buy a great deal of U.S. government debt is because
they have dollars left over from the sale of their goods to the U.S. and want to buy something dollar denominated
the income-expenditure identify got an open economy is
Y = C + I + G + NX
savings for an economy is equal to
private savings + public savings
China’s high net exports must be balanced by
high net capital outflows
in the market for loanable funds in an open economy, the demand for loanable funds
can be demanded for domestic investment or international investment
reduction in domestic investment caused by governments running a deficit
“crowding out” effect
the exchange rate is the
value of one currency expressed in terms of another currency
if $1 is worth .8 Canadian dollars, then 1 Canadian dollar is worth
$1.25
when the value of one currency increases relative to the value of another currency, it has experienced
exchange rate appreciation
when the U.S. dollar appreciates against a foreign currency, U.S. goods become
more expensive to people abroad, and we expect net exports to decrease
the demand for dollars will increase in foreign exchange markets if
U.S. interest rates are high relative to those overseas
when the Fed lowers the interest rate
both investment and net exports increase
can occur to currencies with fixed exchange rates
a speculative attack
the institution that is responsible for maintaining international monetary stability is the
international monetary fund
digital assets created outside the realm of the government
cryptocurrencies
-mining them
-buying them from an exchange
-buying them from an ATM machine
3 ways to get cryptocurrencies
