ECON CH 10 Flashcards
barter
the exchange of one good for another
double coincidence of wants
the unlikely occurrence that two people each have a good the other wants
money
a medium of exchange, a means of payment: what sellers generally accept and buyers generally use to pay for goods and services
three major functions of money
- medium of exchange
- store of value
- unit of account
medium of exchange
an item buyers give to sellers when they buy G&S
unit of account
a standard unit that provides a consistent way of quoting prices and record debts
store of value (saving)
an item people can use to transfer purchasing power from the present to the future (to save)
commodity monies
items used as money that also have intrinsic value in some other uses (gold, diamonds, cigs)
fiât or token money
items designated as money that are intrinsically worthless (the US dollar bill)
money supply
the quantity of money available in the economy to cover all the transactions
M1
includes currency (cash) in circulation, demand deposits, travelers checks, and other checkable deposits
M2
everything in M1 plus savings deposits, small time deposits, money market mutual funds, and a few other minor categories
MS
=currency+deposits
no change
M1 goes down, what happens to M2
M1
also known as transactions money
M2
also known as Broad money
M1
what is more liquid? M1 or M2?
M2
what is more stable? M1 or M2?
financial intermediaries
are banks and other financial institutions that act as links between those who have money to lend and those who want to borrow money (commercial banks, life insurance, pension funds, and saving and loan associations)
- overseas the banking system
2. makes the monetary policy
the FEDs 2 major tasks
monetary policy
actions undertaken by the FED to control (change) the supply of money and the cost of money (interest rate) to help stabilize the economy
required reserves
the FED requires that banks should hold (not loan out) a certain fraction (of their deposits)
excess reserves=
reserves-required reserves
required reserves=
%required reserve ration X deposits
loan up
banks make this to the point where its excess reserves are zero
excess reserves
used by banks to make loans
reserve requirement ration (RRR)
the fraction (percentage) of deposits that banks hold as reserves with the FED
RRR example
RRR=10% means that if a bank receive a deposit of $100 then $10 will be hold as reserve and $90, the excess reserve, is loaned out to investors
increase in MS
an increase in bank reserves leads to a greater that one-for-one increase in what
money multiplier
the relationship between the final change in MS and the change in reserves that caused this change
money multiplier
the multiple by which MS can increase for every dollar increase in reserves
1/RRR
money multiplier formula
FED
the central bank of the USA
lender last resort
the FED provides funds to troubled banks that cannot find any other sources of funds
open market operations
are the purchases and sales by the Fed of gov securities (bills and bonds) in the open market
MS goes down
when Fed sells bonds, what happens to MS
MS goes up
when Fed buys bonds, what happens to MS
- changing the RRR
- changing the discount rate
- engaging in the open market operations
three tools available for the Fed to change the MS
RRR
establishes a link between banks` reserves and the deposits the commercial banks are allowed to create in the banking system
decrease RRR
if the Fed wants to increase MS, they increase or decrease RRR (which allows banks to create more deposits by loaning out more money)
higher money multiplier
a lower RRR means
discount rate
interest rate that banks pay to the Fed when they borrow money from Fed
increases the MS
when a bank borrows from the Fed, it increases the reserves in the banking system which does what to the MS
increases the MS
the lower the discount rate, the lower the cost of borrowing from the Fed, thus banks will borrow more and lend out more, doing what to the MS
banks borrow more
if the discount rate is down then banks borrow more or less?
money eliminates the “double coincidence of wants” problem
the development of money as a medium of exchange has facilitated the expansion of economic activity because
decrease M1 and not change M2
dude transfers $2500 from his checking account to his savings. this transaction will do what to M1 and M2
multiply $750 by 30%=$225
$750 in deposits and RRR= 30%
loaned up
when a bank has no excess reserves, and thus can make no more loans, it is what
- discount rate
- open market operations
- RRR
three instruments used in the Fed to change the MS
will increase the MS
a decrease in the RRR will do what to the MS
buying gov securities in the open market
what action by the Fed is designed to increase the MS
decrease, decrease
an open market sale of securities by the Fed results in ——- in reserves and ——in the supply of money (increase or decrease)
bonds go up
interest rates go up, what happens to bonds
money goes up
interest rates go down, what happens to money
