Econ-Chapter 6A Flashcards
Bastiat says
it is absolutely necessary to forget money, coins, bank notes, and the other media by which products pass from hand to hand, in order to see only the products themselves, which constitute the real substance…. Money makes its appearance only to facilitate the arrangement among several parties
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 exchange with barter there must exist this
Smith lists the following tools that evolve into money
- labor(the original common medium of exchange)
- cattle
- salt
- cowry
- cod
- tobacco
- sugar
- iron
- copper
- cold and silver
strangest form of money ever used
rai stones
us prisoners used cigarettes as money but now use
notably mackerel
a good is more likely to evolve into money if it fulfills the following..
functions of money
functions of money
medium of exchange
unit of account
store of value
commodity money
money might have other uses
fiat money
money may not have any use
The wellspring of all US dollars are in
the federal reserve system and the banking system
liquidity
the ease with which an asset can be converted to spendable form
M1
the most referenced measurement, commonly thought of as money
M1 is the sum of
paper currency held outside the banks
checking account balances
travelers checks
The US Federal Reserve
creates every UD dollar that exists, was established in 1913 to stabilize the banking system through being a lender of last resort to troubled banks
The economists belief the Fed caused
the great depression
the fed doesn’t depend on____ for a budget
congress, it finances itself
US was suppose to be represented by
12 district banks
Government interests are represented by the board of governors which includes
- seven governors, appointed by the president with the advice and consent of the senate, who serve fourteen year terms
- a chairman, who is appointed by the US President every four years, who must also face confirmation by the US Senate
through monetary policy..
the fed uses the money supply to attempt to affect the economy
Federal Open Market Committee; conducts monetary policy
-the board of governors
-the president of the New York Federal Reserve Bank
The Presidents of the other eleven district banks, four of whom vote at each meeting on a rotating basis
the three tools of monetary policy are
- Open Market Operations
- The required reserve ratio
- the discount rate
Open Market Operations
buying and selling US government bonds from individuals and businesses who previously bought them from he US government
When the Fed buys bonds, bonds flow into the Fed and money flows into the economy,
increasing the money supply, and vice versa
The Required Reserve Ratio (Deffiniton)
The fed sets the required reserve ratio, which is the percentage of deposits that banks cannot lend out, but must hold as reserves
the required reserve ratio
-a banks reserves consists of its vault cash plus the banks account with the Fed
-Excess reserves are reserves that banks hold in excess of those the Fed requires
-at any point in time the bank can lend out its excess reserves
-the current require reserve ratio is 10%
-with a lower ratio, banks can lend more,and vice versa
this creates new money
the Fed is NOT part of the money supply, while money in households and business accounts
ARE apart of the money supply
Discount Rate
When a bank borrows from the Fed it pays an interest rate called this, which the Fed sets by command
In creating money the Fed’s target is the
Federal Funds Rate, which is a free market rate at which banks lend to other banks
The Fed prefers to use
open market operations, rather than the other two tools
Money expands through the banking system through the process of
lending, relending, and more relending
Money simplifies the exchange by
giving a common unit of account
Value of the dollar in the domestic economy
depends on how many and which goods and services it will buy
Consumer Price Index
the measurement is a weighted average of the prices-weighted by the amounts of the goods that consumers purchase
measured by the Bureau of Labor Statistics
PCE price index (Personal consumption expenditures index)
excludes food and fuel
measured by the Federal Reserve
