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Macro > Exam 3 > Flashcards

Exam 3 Flashcards

1
Q

3 functions of money

A
  1. Medium of Exchange
  2. Store of Value
  3. Unit of Account
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2
Q

3 Types of Money

A
  1. Fiat Money
  2. Commodity Money
  3. Commodity Backed Money
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3
Q

Fiat Money

A

Money without intrinsic value (not backed by value) that is used as money due to government decree. Most money is fiat money

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4
Q

Commodity Money

A

Money that takes the form of a commodity with intrinsic value ( gold, silver, precious metals, grain, salt,etc)

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5
Q

Money Stock

A

quantity of money circulating in the economy

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6
Q

Money Supply

A

sum of currency ( coin and paper money) and deposits at banks

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7
Q

Currency

A

Money in its physical form ( coin and paper money)

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8
Q

Checking Deposits

A

accounts at a financial institution that checks can be written ( checkable deposits)

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9
Q

M1 (measure of money)

A

currency plus checking deposits and travelers checks

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10
Q

M2 ( measure of money)

A

M1 + savings deposits, time deposits, and accounts with limited check writing ability

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11
Q

Savings Deposit

A

deposit that pays interest from an account that allow normal withdrawal

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12
Q

Time Deposit

A

deposit that pays interest over a certain period of time, withdrawal causes loss of interest if before time period ends

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13
Q

FED (Federal Reserve System)

A

central bank of the united states, oversees creation of money in US

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14
Q

bank

A

firm that channels funds from “savers” to “investors” by accepting deposits and making loans

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15
Q

FED board of governors

A 
"Federal Reserve Board"
7 members
14 year non-renewable terms
appointed by president
confirmed by senate
1 governor appointed Chairman of Board by president
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16
Q

FED district banks

A

12 district banks

President of each bank sits on FOMC

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17
Q

Federal Open Market Committee (FOMC)

A

committee makes decisions regarding influencing money supply in the US/ implementing monetary policy
meets 8 times per year
5 presidents vote at time( president of NY FED bank + group of 4 rotating presidents)
7 Governors + 12 District Bank Presidents

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18
Q

Monetary Policy

A
  1. Reserves Ratio
  2. Open Market Operations
  3. Discount Rate
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19
Q

Reserves Ratio

A

“fractional-reserve banking”, reserves required, interest on reserves and the money multiplier

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20
Q

Open Market Operations

A

Selling and Purchasing of Bonds

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21
Q

Discount Rate

A

Rate that is charged to banks by the FED for short term loans

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22
Q

Short Term Interest Rate

A

interest rate on financial assets “loans” that mature in six months or less

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23
Q

Long Term Interest Rate

A

interest rate on financial assets “loans” that mature after longer than 1 year

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24
Q

Money Demand Curve

A

shows the relationship between the quantity of money demanded and the interest rate

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25
Q

shifts in the money supply curve are due to:

A
  1. Aggregate Price Level
  2. Real GDP
  3. Technology
  4. Institutions
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26
Q

Liquidity Preference Model

A

says interest rate is determined by the supply and demand for money

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27
Q

(Setting Federal Funds Rate) effect on interest rate

An Open Market Purchase…….

A

drives the interest rate down

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28
Q

(Setting Federal Funds Rate) effect on interest rate

An Open Market Sale…

A

drives the interest rate up

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29
Q

Expansionary Monetary Policy

A

policy that increases aggregate demand ( shifts AD to right)

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30
Q

Contractionary Monetary Policy

A

policy that decreases aggregate demand (shifts AD to left)

31
Q

Fiscal Policy

A

Use of government spending and taxation to influence size of economic fluctuations

32
Q

Federal Budget

A

Summary of the federal governments proposal for spending, taxes, and the deficit

33
Q

Fiscal Year

A

runs October to October

34
Q

Balanced Budget

A

tax revenues = government spending

35
Q

Budget Surplus

A

tax revenues > government spending

36
Q

Budget Deficit

A

tax revenues

37
Q

Government Tax Revenue Sources

A
  1. Personal Income
  2. Corporate Income
  3. Payroll
  4. Others taxes
38
Q

Government Expenditures

A
  1. Social Security
  2. Medicaid
  3. Defense
  4. Interest on debt
  5. other government programs
39
Q

Federal Debt

A

total amount of outstanding loans owned by the government

40
Q

Debt to GDP ratio

A

total amount of outstanding loans owned by the federal government divided by nominal GDP

41
Q

Objective of fiscal policy…

A

Get economy back to potential GDP

42
Q

When the economy is below potential GDP fiscal policy requires spending to …

A

increase spending

43
Q

When the economy is above potential GDP fiscal policy requires spending to..

A

decrease spending

44
Q

Recession

A

2 consecutive quarters which the economy declines below its long term trend

45
Q

Boom

A

2 consecutive quarters which the economy rises above its long term trend

46
Q

Potential GDP

A

economies long term growth trend for real GDP determined by the available supply of capital, labor, and technology

47
Q

High Potential GDP

A

unemployment drops below the natural rate

48
Q

Low Potential GDP

A

unemployment drops below the natural rate

49
Q

Real Business Cycle Theory

A

Theory that potential GDP is the source of economic fluctuations (real GDP)….usually due to technology

50
Q

Criticism to Real Business Cycle Theory

A

GDP tends to grow smoothly over time (slow)

51
Q

Reasons why Potential GDP changes slowly

A
  1. populations do not increase of decrease very quickly
  2. capital grows slowly over time
  3. impact of technological change spreads throughout economy only gradually
  4. no sudden decrease in technological know how
52
Q

AD-IA model

A

used to explain fluctuations in real GDP and inflation

AD : aggregate demand curve
IA: Inflation adjustment line (SR,MR,LR)

53
Q

Aggregate Demand Curve

A

line showing negative relationship between inflation and the aggregate quantity of goods and services demanded at that inflation rate

54
Q

causes of AD Shifts to (Right):

A
  1. Increase in Government Spending
  2. Decrease in Taxes
  3. Increase in foreign demand
  4. Increase in consumption
  5. monetary policy shift to higher target inflation rate
55
Q

causes of AD shifts to (left):

A
  1. Decrease in government spending
  2. Increase in Taxes
  3. Decrease in foreign demand
  4. Decrease in Consumption
  5. Monetary Policy shift to lower target inflation rate
56
Q

Money Multiplier

A

1/RRR

57
Q

Required Reserves Ratio

A

% of banks deposits that the bank must hold at the FED

Usually 10%

58
Q

Reserve

A

Lump sum deposits that commercial banks hold at the FED

59
Q

Bank Run

A

When everybody at a certain bank demands their deposits at once, and the banks do not have the ability to cash all the deposits

60
Q

Hyperinflation

A

period of very high inflation

caused by abnormally high growth rates for the money supply

61
Q

Real Interest Rate

A

nominal interest rate + inflation rate

62
Q

Counter Cyclical Policy

A

a policy designed to offset the fluctuations in the business cycle

63
Q

Discretionary Fiscal Policy

A

changes in taxes or spending policy requiring legislative action by the president or congress

ex: 1968 temporary income tax surcharge, Bush home owner tax rebate

64
Q

Automatic Stabilizer

A

automatic tax spending that occurs over the course of the business cycle and tends to stabilize fluctuations in real GDP

ex: tax on income

65
Q

Asset

A

something of value owned by a firm or a person

66
Q

Liability

A

something of value that a person or firm owes to someone else

67
Q

Bond

A

promise of a firm or the government to pay back a certain amount of money after a given period of time

68
Q

Balance Sheet

A

listing of all assets owned by the banks as well as all liabilities owned by the banks

69
Q

Loan

A

funds made available by banks to individuals or firms for a period of time, banks earn interest on these loans

70
Q

Quantity Theory of Money

A

states that the quantity of money available determines the price level

growth rate in the quantity of money available determines the inflation rate

71
Q

Quantity Equation of Money

A

equation relating the price level and real GDP to the quantity of money and the velocity of money

MV=PY

72
Q

Velocity (money)

A

measure of how frequently money is turned over in the economy, number of times each dollar is used on average to make purchases

73
Q

Money Growth + Velocity Growth =

A

Price Level Growth+Real GDP Growth

74
Q

Inflation=

A

(money growth+velocity growth)- Real GDP growth

Macro (3 decks)

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