Exam #3 Flashcards
1
Q
What is Money?
A
It is a LIQUID ASSET, Coins, Shells, Paper, or other material (Makes trading easier)
2
Q
(What is Money) Commodity
A
Money whos value comes from the item it is made from.
-Gold Coins
-Shells
-Diamond
-Tobacco
3
Q
(What is Money) Representative Money
A
Paper that represents the
-commodity
-Backed up by a commodity
-Gold Standard
4
Q
(What is Money) Fiat Money
A
Backed by confidence in the government
-Guaranted by government’s ability to keep value stable
- More flexible than commodity money
- Value not affected by world commodity levels
-Token currency: face value greater than intrinsic value of the material
5
Q
(Functions of Money) Medium of Exchange
A
used to buy and sell goods and services
6
Q
(Functions of Money) Unit of Account
A
A standard way to value business activities
7
Q
(Functions of Money) Store of Value
A
hold wealth for future use
8
Q
(Functions of Money) Standard of Deferred Payment
A
facilitates purchases over a long time period
9
Q
(Value of Money) Why is Money Valuable?
A
-Acceptability
-Legal Tender
-Relative scarcity
10
Q
(Value of Money) Purchasing
A
-Prices affect purchasing power of money
-Hyperinflation renders money unacceptable
-Controlling money supply to stabilize money’s purchasing power
11
Q
Which of the following is Money?
- Gold
- Ferdous Painting
- Dime
A
- Gold is not money BC it’s not used as “Medium of Exchange” & does not serve a unit of account. It can Serve store of value.
-Ferdous painting is a store of value BC it can be held for future use of wealth
-Dime is money BC it serves all three functions of money.
12
Q
(Money Definition) M1
A
MOST LIQUID form of MONEY. Includes all currency (Paper and coins), electronic checking account deposits, and traveler’s checks.
13
Q
(Money Definition) M2
A
LIMITED number of Transfer per Month or YEAR. Includes EVERYTHING in M1 + other accounts that can easily be liquidated
- Savings deposits including money market deposit accounts
-Small-denominated time deposits
-Money market mutual funds.
14
Q
(Money Definition) M2 is _ times larger than M1
A
4
15
Q
(Money Definition) What isn’t counted as Money?
A
Credit Cards and Physical assets
16
Q
(Money Definition) What are institutions that offer checkable deposits?
A
-Commercial Banks
-Savings and loan associations
-Mutual savings banks
-Credit Unions
17
Q
(The Federal Reserve Bank) What is the Central Bank of the United States?
A
The Fed
18
Q
(The Federal Reserve Bank) What is Monetary Policy?
A
The actions taken by the Fed to influence the Economy
The Monetary Policy Goals are:
-Stable Prices
-Low Unemployment
-Economic Growth
19
Q
(FEDERAL RESERVE LEGISLATION) What is the Federal Reserve Act in Simple Terms?
A
a law that created the central banking system of the United States and gave it certain powers to promote the stability of the financial system.
20
Q
(FEDERAL RESERVE LEGISLATION) Three important things about Humphrey-Hawkins Act of 1978.
A
- Unemployment Rate of 4% or less
- Inflation of 3% or less
- The Fed’s Board of Governors Reports to Congress twice per year about the
Fed’s Monetary Policy.
21
Q
(Federal Reserve Bank) What is the Order?
A
Top = The Fed Reserve System
Mid = Fed Board Governors, Fed Reserve Banks, Fed Open Markets
22
Q
Moral Hazard
A
Less Care when you have Help. Ex. 20 per hour job, You won’t work Hard BC u still get PAID THE SAME.
23
Q
(Bank Run) What is Bank run?
A
There is a Panic!
Customers run to bank to pull out all the money.
- Get your money out before Bank runs out of money.
- FDIC covers up to $250,000 per bank.
24
Q
(Balance Sheet for a Bank) What is an Asset?
TOTAL ASSETS = TOTAL LIABILITIES
A
Asset: something of value, owed/belonging to the bank
- Reserves
- Loans
- Securities
- Physical property
25
(Balance Sheet for a Bank) What is a Liability?
TOTAL ASSETS = TOTAL LIABILITIES
Liability: something of cost, owed by the bank
- Deposits
- Shareholders equity
26
(Money Creation) What is the process of money creation?
Banks are a part of the money creation process by LENDING deposits.
27
(Money Creation) The money supply increases every time a ____ is made.
every time a LOAN is made.
28
(Treasury Securities) What are the three types of Treasury Securities?
1) Treasury Bills
2) Notes
3) Bonds
29
(Treasury Securities) What are Treasury Bills?
Short-term securities maturing in a few days to 52 weeks
30
(Treasury Securities) What are Notes?
Longer-term securities maturing within ten years
31
(Treasury Securities) What are Bonds?
Long-term securities that typically mature in 30 years and pay interest every six months
32
What is Liquidity?
Fastest way to make Assets into Cash. More Liquid = Easy to use or Easy to trade for goods or services. For example, Cash = very liquid since it can be EASILY TRADED, whereas Rolex isn't that liquid since It's hard to trade compared to money.
33
What is Leverage?
use of borrowed money to invest in financial assets with the goal of generating higher returns.
34
What are the Two main kinds of stocks?
Common stock & preferred stock.
35
(Stocks) What are Common Stocks?
has the ability to Vote and Receives dividends.
36
(Stocks) What are Preferred Stocks?
No voting, Receive Dividends BEFORE common stock Holders, Prioritized when Company goes bankrupt before common stock holders.
37
(Stocks) What are Growth Stocks?
have earnings growing at a faster rate than the market average. They rarely
pay dividends and investors buy them in the hope of capital appreciation
38
(Stocks) What are Income Stocks?
pay dividends consistently. Investors buy them for the income they generate.
An established utility company is likely to be an income stock.
39
(Stocks) What are Value Stocks?
have a low price-to-earnings (PE) ratio, meaning they are cheaper to buy than
stocks with a higher PE. Value stocks may be growth or income stocks, and their low PE ratio
may reflect the fact that they have fallen out of favor with investors for some reason. People
buy value stocks in the hope that the market has overreacted and that the price will rebound.
40
(Stocks) What are Blue-Chip Stocks?
Big Companies Aka Apple, Amazon, Google. Are shares in large, well-known companies with a solid history of growth.
They generally pay dividends.
41
(Bonds) Name the Types of Bonds
-Corporate Bonds
- Investment Grade
-High Yeild
-Municipal Bonds
42
(Bonds) What are Corporate Bonds?
are debt securities issued by private and public corporations.
43
(Bonds) What are Investment-Grade?
(Low Risk Low Reward aka Coward)These bonds have a higher credit rating, implying less credit risk, than high-yield corporate bonds.
44
(Bonds) Define High-Yeild
(HIGH RISK HIGH REWARD) These bonds have a lower credit rating, implying higher credit risk, than investment-grade bonds and, therefore,
offer higher interest rates in return for the increased risk.
45
(Bonds) What are Municipal Bonds?
Municipal bonds are a type of debt security issued by state and local governments to finance public projects, and they offer investors a relatively safe and stable investment with tax advantages.
46
(Funds) What are the Types of Funds?
-Mutual Funds
-Exchange Traded Funds(ETF)
-Index Fund
-Money Market Fund
47
(Funds) What are Mutual Funds?
A mutual fund is a company that pools money from many investors and invests the money
in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are
known as its portfolio. Investors buy shares in mutual funds. Each share represents an investor’s part
ownership in the fund and the income it generates.
48
(Funds) What are Exchange Traded Funds?
offer investors a way to pool their money in a fund
that makes investments in stocks, bonds, or other assets and, in return, to receive an interest in that
investment pool. Unlike mutual funds, however, ETF shares are traded on a national stock exchange and
at market prices.
49
(Funds) What are Index Fund?
Basket of securities such as Stocks or bonds.
50
(Funds) What are Money Market Fund?
Money market funds invest in high quality,
short-term debt securities and pay dividends that generally reflect short-term interest rates.
51
What is the Formula that calculates the COMPOUND INTEREST?
A= Value (1+Interest/1)^Years
52
Elaborate on Risks and Diversification
All Investments can be Risky since it's possible to lose money. Higher Interest = Higher Risk.
Diversification = Reduce Risk by purchasing MULTIPLE investments.
53
(Monetary Policy) What are the direct tools of the Fed?
- Open Market Operations
-Interest on Reserves
-Discount Rate
-Required Reserves (No longer in active use)
54
(Monetary Policy) What is the indirect result?
Money supply changes influence interest rates, which then causes
shifts in the Aggregate Demand curve.
55
(Monetary Policy) What are the Quick Influences?
sometimes just announcing the target rate causes movement in the
actual rate, without any further action from the Fed.
56
(Open Market Operations) What is Open Market Operations?
Buying/Selling Treasury Securities or other Assets
57
(Open Market Operations) Buying Securities:
Increase the Money Supply
58
(Open Market Operations) Selling Securities
Decrease the Money Supply
59
(Open Market Operations) When does Liquidity Trap happen?
When rates are near ZERO and the Economy has not yet returned to long run GDP.
60
(Federal Funds Rate) What is Federal Funds Rate?
The rate that banks borrow and lend money to each other overnight
61
(Federal Funds Rate) How does the FOMC set a target for the federal funds rate?
INDIRECTLY
62
(Federal Funds Rate) How does the Fed Influence this rate?
- Through Open Market Operations
- Buying and Selling Securities changes the money supply.
63
(Federal Funds Rate) How does Fed battle Inflation?
- They set a target rate, and then use OMO to change the rate indirectly
64
(Expansionary Monetary Policy) What is the Goal?
To increase AD and close a recessionary gap
65
(Expansionary Monetary Policy) The economy is below the LR level of rGDP and experiencing a _____
Recession
66
(Expansionary Monetary Policy) What are the Expansionary Policies?
- Buy Treasury Securities
- Lower Discount Rate
- Lower reserves interest rate
67
(Contractionary Monetary Policy) What is the Goal?
To decrease AD and close an inflationary gap
68
(Contractionary Monetary Policy) Economy has expanded past the LR level of rGDP and the economy is experiencing high _____
inflation
69
(Contractionary Monetary Policy) What are the Contractionary Policies?
- Sell Treasury Securities
- Raise Discount Rate
- Raise reserves interest rate
70
(Fiscal Policy) What is Fiscal Policy?
Fiscal policy is the use of government spending and taxation to influence the economy. (NOT ALL GOV SPENDING and TAXES count as FISCAL policy)
71
(Fiscal Policy) The U.S. government has the simultaneous goals of
1. Full-employment
2. Stable inflation
3. Economic Growth
72
(Fiscal Policy) Fiscal policy is the tool used to achieve these goals.
1. Increase/decrease spending
2. Increase/decrease taxes
73
(Expansionary Fiscal Policy) Expansionary fiscal policy is typically used during
a recession
74
(Expansionary Fiscal Policy) Expansionary fiscal policy focuses on
- Increase spending
- Decrease taxes
75
(Expansionary Fiscal Policy) Expansionary fiscal policy shifts the AD curve to
the right
76
(Expansionary Fiscal Policy) Because of the GDP multiplier, the tax and spending change
should be
less than the total gap.
77
(Contractionary Fiscal Policy) What is Contractionary Fiscal Policy used for?
Contractionary fiscal policy is used to contract(shrink) the
economy. This is typically used to reduce inflation.
78
(Contractionary Fiscal Policy) Contractionary Fiscal Policy focuses on
- Decrease spending
- Increase taxes
79
(Contractionary Fiscal Policy) Contractionary Fiscal policy shifts the
AD curve to the left
80
_____ policies shrink the size of the government.
Contractionary Fiscal Policy
81
_____ policies expand the size of the government.
Contractionary Monetary Policy
82
(Automatic Stabilizers) Factors are
- People can claim unemployment benefits
- Tax rates fall as income decline
- More people qualify for transfer programs
83
(Automatic Stabilizers) As soon as economic activity starts to decline, automatic stabilizers slow down the
decline by
reducing taxes and increasing income.
84
(Problems with Fiscal Policy)
What are the Time lags?
Fiscal policy is slow!!
- Recognition lag (it takes time to discover the problem)
- Implementation lag (it takes time to create a policy to address the problem)
- Impact lag (it takes time for the policy to affect AD)
85
(Crowding effects) What is Crowding effects?
federal spending and borrowing affect interest rates and exchange rates
which dampen the effect of the fiscal policy.
86
(Crowding effects) Expansionary policies increase spending or cut tax revenue.
- Goal is to increase AD.
- The government issues new bonds to raise money
- The additional debt raises interest rates, crowding-out private investment and consumption.
87
(Crowding effects) Contractionary policies decrease the supply of bonds as deficit spending declines. This causes
interest rates to drop, exchange rates to drop.
- Goal is to decrease AD.
- The government debt decreases & the supply of bonds goes down.
- Fewer bonds decreases interest rates, which increases consumption and investment
88
(Budget Terms)
What is Budget?
Total planned government expenditures
89
(Budget Terms) What is Balanced budget?
when tax revenues equal government expenditures
90
(Budget Terms) What is Budget Surplus?
tax revenue exceeds government expenditures.
91
(Budget Terms) What is Budget deficit?
tax revenue is less than government expenditures.
92
(The Multiplier) Money Multiplier =
1/ Reserve Ratio (no longer required)
93
(The Multiplier) Deposit Multiplier
1/ Loan Ratio
(not creating physical currency, but electronic bank deposits)
94
(The Multiplier) Money multiplies faster when
less reserves are held and more loans are made
95
(Potential Problem) with Fiscal Policy
Time to create policy and takes time to discover the problem. TIME IS THE ISSUE
96
(Monetary Policy) Expansionary vs Contractionary. What are the Differences?
Expansionary = Increase AD and close Recessionary GAP. Economy = Below LR level of rGDP & in a recession.
Policies include, Buy securities, lower DISCOUNT rate, lower reserves INTEREST rate.
VS
Contractionary = Decrease AD and close an inflationary GAP. Economy = Above LR level of rGDP and in high Inflation.
Policies include, Sell securities, raise DISCOUNT, raise reserves INTEREST RATE.
97
(Fiscal Policy)
Expansionary vs Contractionary. What are the Differences?
Expansionary = used during recession.
Increases Spending & Decreases Taxes.
Shifts AD curve to the RIGHT.
VS
Contractionary = used to REDUCE inflation.
Decrease Spending & Increase Taxes.
Shifts AD curve to LEFT.
98
(QUIZ) What are the four functions of money?
Store of Value, Medium of Exchange, Unit of Account, Standard of Deferred
Payment.
99
(QUIZ) Examples of M1?
1) $0.27 cents that has accumulated under a couch cushion.
2)The $210 balance in your checking account.
3)$200 in traveler's checks you have purchased for your spring-break trip.
100
(QUIZ) Examples of M2
M1+ $417 in your savings account.
101
(QUIZ) Why is the banking system in the U.S. referred to as fractional reserve banking? Explain
how bank lending leads to increased money supply.
Because banks in the US
do not have to keep the full customer deposits as reserves. They keep a portion (or
fraction) of the deposits and lend/invest the rest. Every time the bank lends out
customer deposits it increases the digital balance of the borrower’s bank account
without decreasing the balance of the account it was taken from.
102
(QUIZ) What is the difference between an asset and a liability on a bank’s balance sheet?
An asset is anything of value that the bank owns. Bank assets are
the loans they have given out, reserves, and property. Liabilities are anything that
the bank owes to customers or shareholders. Liabilities are debts or bills for the
bank, such as customer deposits.
103
(QUIZ) Explain what a bank run is, and how it can cause a bank to go out of business.
A bank run happens when customers lose faith in the bank and try to pull all of
their money out. Since banks lend a portion of deposits out, they do not have the full
account balances to give back to customers all at once. A bank run gets it name
from people running to the bank to get their money out before the bank closes and
the money is lost. Too many people taking money out causes liquidity problems for
the bank and if too much is requested at once can cause the bank to go out of
business. In modern times, FDIC insurance and other regulations safeguard
customer deposits so they will not lose everything if their bank permanently closes.
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