Exam 3 Flashcards
Fiat money
Only worth something as money (no intrinsic value)
3 functions of money
Medium of exchange, unit of account, store of value
Commodity money.
Paper money backed by valuable things like gold, silver, etc
Total reserves
Cash held in banks plus each banks’s account balance at federal reserves
Reserve ratio
Reserves/
Deposits
The fed
Central bank of the U.S.
The fed’s 2 main functions
Monetary policy & regulate banks
Open market operations
Buying/selling government bonds
Fractional reserve banking
Deposits that banks don’t keep as reserves are loaned out
Money multiplier
Deposits/
Reserves
Quantitative easing
Fed buys/sells riskier assets
Discount rate
Interest rate the fed charges on loans to banks
Inflation
Rise in the price level
Deflation
Drop in the price level
If the price level is P, the value of a dollar is
1/P
Money demand comes from
People’s desire to hold their wealth as liquid assets
Nominal variable
Measured in money
Real variable
Adjusted for inflation
Money neutrality
In the long run, changes in the money supply do not affect real variables
Velocity
Price level x real GDP/
Money supply
The fisher effect
A 1% rise in the inflation rate will cause a 1% rise in the nominal interest rate
Shoeleather costs
Time & effort wasted converting illiquid assets to money & vice versa
Unexpected inflation
Redistributes wealth from savers to borrowers
Hyperinflation
Inflation rate hirer than 10%, usually much higher than that
At any point in time, M1 ? M2 ? M3
M1 < M2 < M3
In a system of 100% reserve banking, banks do or do not affect the supply of money?
Do not
To reduce the impact of falling money supply, the fed can
Buy treasury stock
The inflation rate is equal to
The growth rate of the price level
If the economy is experiencing deflation, the price level is
Decreasing
Increase in value of money leads to
Decrease in money demanded
In the long run, changes in the money supply affect
Nominal variables, but not real variables
