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Econ 201 > Final > Flashcards

Final Flashcards

0
Q

Why the movement from commodity money to fiat money?

A

As an economy grows it needs more money.

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1
Q

What is the definition of money?

A

Anything people accept in exchange for goods

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2
Q

What is greshams law?

A

Bad money drives out good money.

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3
Q

What is barter?

A

Good exchanges for goods

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4
Q

What makes money better than barter?

A

Producers have more time to produce rather than spending time on trading

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5
Q

What is the function of money?

A

Medium of exchange, standard unit for quoting prices

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6
Q

What is commodity money?

A

Has use outside its function as money. I.e. Gold, silver

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7
Q

What is fiduciary money?

A

Redeemable money, backed by commodity money

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8
Q

What is fiat money?

A

Gov says its money, faith in issuer

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9
Q

What is seigniorage?

A

Profit from printing money

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10
Q

What is M1?

A

Measures the purchasing power immediately available to the public without borrowing or giving notice; readily spendable

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11
Q

What are examples of M1?

A

Coins, paper money, checking, checks

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12
Q

What is checking?

A

Demand account, converted to dollars “on demand”

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13
Q

What is M2?

A

Contains components that are less liquid; M1, savings deposits and small time deposits

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14
Q

What are savings deposits?

A

Interest bearing deposits that can be easily withdrawn

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15
Q

What is the equation for M3?

A

M2 + large time deposits

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16
Q

Why do we measure money?

A

Need to have just enough

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17
Q

Explain first banks

A

Goldsmiths; gold on deposit for a receipt and served as fiduciary receipt

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18
Q

What is fractional reserve banking?

A

Source of banks profits, increase the supply of money, where gold is reserved?

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19
Q

If goldsmith fails what happens to money supply?

A

It rapidly contracts, receipts are no good

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20
Q

Explain bank profits vs bank stability

A

High profits mean less stability and vice versa

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21
Q

How do banks earn profits?

A

Fee for gold storage and interest on loans

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22
Q

How to attract depositors?

A

No fee for deposits, create faith in bank

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23
Q

How do banks stay stable and keep faith?

A

Keep enough reserves on hand to meet demands; make low risk loans

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24
Q

What are runs?

A

Depositors want their money back

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25
Q

What are low reserves?

A

Bank can’t meet withdrawal demands

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26
Q

What are assets?

A

Owned by the bank

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27
Q

What are liabilities?

A

Owed by bank

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28
Q

What is a money multiplier?

A

Tells you the total increase in the money supply resulting from a deposit

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29
Q

What is the equation for money multiplier?

A

Money multiplier= 1/ reserve requirement(RR)

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30
Q

Reasons to control money supply?

A

Banks are out to make profits: can make inflation and recession worse

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31
Q

How can banks worsen recession?

A

Bad time for loans, contracts the money supply, less spending, recession worsens

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32
Q

How do banks worsen inflation?

A

Good time for loans, increase money supply, more spending, inflation worsens

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33
Q

What is the federal reserve system?

A

The Feds, bankers bank, corporation where members are shareholders and more like customers.

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34
Q

How is the fed quassi-public?

A

Financially independent, congress can influence through legislation

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35
Q

What part of the fed is out of politicians hands?

A

Printing press

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36
Q

What the Feds responsibilities?

A

Controls money supply, bankers bank- lender of last resort, determine reserve requirement, check clearing and prints notes

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37
Q

Who deals with minting coins and in charge of debt?

A

Treasury

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38
Q

What are the tools that the fed use to influence money supply?

A

Reserve requirement, discount rate, federal funding rate, and open market operations

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39
Q

What is the discount rate?

A

Rate at which banks borrow from fed to cover temporary deficiencies

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40
Q

What is the federal fund rate?

A

Rate at which banks borrow from one another

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41
Q

What is the open market operations?

A

Fed buys or sells treasury bills (ious)

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42
Q

How does fed use reserve requirements?

A

Affects banks excess reserves; lower requirement means more excess reserves, more loans, lower interest ( vice versa)

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43
Q

How does the Feds use discount rate?

A

Low interest rates for member banks, but banks are reluctant to borrow bc may indicate weakness; fed changes discount rate as signal where wants interest rates to go

44
Q

How does the Feds use the fed funds rate?

A

What banks charge each other, rate is set by supply and demand

45
Q

What is the prime rate?

A

Rate at which banks charge best customers; get best rate

46
Q

What are t-bills?

A

Treasury bills- u.s. IOU, mature in 90,180, or 1 yr

47
Q

How long until treasury bonds mature?

A

Up to 30 yrs

48
Q

What do t-bills have?

A

Face value( at maturity); price (less than face value); return ( face value- price); rate of return (return/price)

49
Q

What happens if fed buys t-bills?

A

T-bills demand rise, price raises, interest rate falls; other short term interest rates fall

50
Q

What is the easy money policy?

A

Low interest( credit more available), fed increase money supply, lower fed funds rate, low interest rate for borrowing and saving

51
Q

Easy money policy is a good time for what? Bad?

A

To borrow and spend and a bad time to save

52
Q

Easy money policy is good to use during when?

A

A recession

53
Q

What is tight money policy?

A

fed contracts money supply, fed sells t-bills, bank reserves decrease, banks charge higher interest rates; high interest rates on savings and borrowing

54
Q

Tight money policy is good for when? bad?

A

good time to save, bad time to borrow and spend

55
Q

Tight money policy is good to use during when?

A

inflation- less money in the banking industry, interest rates rise

56
Q

What policy do you use to increase money supply? What way does the supply shift?

A

easy money policy; right

57
Q

what policy do you use to decrease money supply? What way does the supply shift?

A

tight money policy; left

58
Q

What are the two reasons firms and consumers hold dollars?

A

transaction purposes (buy things), and speculative purposes

59
Q

what happens to demand if income rises?

A

more transactions, more money demand

60
Q

what happens to demand if prices rise?

A

everything is more expensive, more money is needed to finance transactions

61
Q

How do you make high interest rate go to equilibrium?

A

surplus of dollars that are converted to bonds, bond demand rises, bond prices rise, interest falls

62
Q

How do you make low interest rate go to equilibrium?

A

shortage of dollars, means bonds are converted to dollars, bond demand falls, bond prices fall, interest rises

63
Q

What happens if there is an increase in money supply?

A

supply shift, dollar surplus, conversion of bonds, bond prices rise and interest falls

64
Q

What is the appropriate policy and monetary linkage to fight inflation?

A

Fed increases interest rates; higher rates means less borrowing and spending by consumers, lower spending means less upward pressure on prices

65
Q

What does high GDP growth tell the Feds?

A

inflation is eminent bc resource utilization rises causing production costs and prices to rise

66
Q

Why is the bond market concerned with inflation?

A

concerned with real interest rate; responds neg t good econ new; high GDP growth means inflation, then bond demand and prices falls

67
Q

How does the Feds increasing interest rates affect stock markets?

A

higher interest rates increase corporate borrowing costs and reduce corp profits

68
Q

What is the monetary policy in recession?

A

increase money supply (buy t-bills), lower interest rates (more borrowing and spending)

69
Q

when does the monetary policy fail in recessions?

A

lose confidence from banks, firms, and consumers

70
Q

what is a credit crunch?

A

banks are reluctant to lend in recession due to high risk; default risk

71
Q

What is the monetary policy in a stagflation?

A

fight inflation with recession; contract money supply, interest rates rise; lower spending which reduces demand and prices, and demand and employment

72
Q

what is the Keynesian argument for monetary policy?

A

policy is complex and can break and fail

73
Q

What is the Monetarists view on monetary policy?

A

monetary policy is very effective; money supply increase, people spend it and demand rises

74
Q

what is the monetarists equation?

A

M x V = P x Q

75
Q

What do the values of the monetarists equation mean?

A

M= money supply, P= overall (avg) price lvl, Q= quantity produced, V= velocity of money

76
Q

what is the velocity of money?

A

number of times in a year a dollar is used

77
Q

With monetarists theory what happens if V is constant?

A

increase in M (more spending), high demand for Q, when Q is fully purchased-higher prices and inflation

78
Q

What is fiscal policy?

A

gov taxing and spending; congress and pres

79
Q

what is monetary policy?

A

control over the money supply and credit; feds

80
Q

How does demand side theory correlate unemployment and inflation?

A

Low unemployment corresponds to high inflation and vice versa

81
Q

What are the short run effects of gov reducing unemployment below the natural rate?

A

unemployment fall, wages and prices rise; eventually self corrects itself

82
Q

What can we learn from the Phillips curve?

A

if unemployment falls below a certain level, inflation will rise quickly

83
Q

What is budget deficit?

A

tax revenue is less than gov spending

84
Q

What are the options the gov has for budget deficits?

A

raise taxes, print money, borrow

85
Q

What is deficits?

A

borrowing in one year

86
Q

what is debt?

A

accumulated deficits

87
Q

What are the justifications for gov borrowing?

A

even tho mostly places a burden on future generations benefits their education and infrastructure; acts as an automatic stabilizer

88
Q

How does the gov balance the budget?

A

reduce spending and increase taxes; recessionary, lower G, C, and I

89
Q

What is the diff between gov and personal debt?

A

personal-backed by assets which limit personal borrowing; gov- not backed by assets, so they have unlimited borrowing ability

90
Q

Who is most of the debt held buy? Why?

A

other gov agencies, insurance corps, foreigners; just want safe interest bearing assets

91
Q

What are some debt issues?

A

tax consequences, debt monetization, twin deficits, crowding out

92
Q

Explain the tax consequences of debt issues.

A

future generations are affected, interest payments limit fiscal policy

93
Q

Explain the debt monetization of debt issues.

A

if fed increase its holding of T-bills during high deficits (high inflation)

94
Q

Explain the Twin deficits of debt issues.

A

debt causes interest rates to rise, more foreign investment, stronger $, exports fall

95
Q

Explain crowding out of debt issue.

A

gov causes higher interest rates, pool of savings has consumers drawing from it

96
Q

Why do countries trade?

A

earth’s resources are not evenly distributed

97
Q

What is an absolute advantage?

A

a country can produce a good using fewer resources

98
Q

What is a comparative advantage?

A

country produces less inefficiently relative to another country

99
Q

What are ways to limit trade? what impact does it have?

A

quota- limit quantity imported; tariff- tax on an import; raises the price of imports

100
Q

Explain how conservatives and liberal feel about job protection with restricting trade?

A

conservative: let inefficient go, frees resources for efficient industries; liberals- high paying jobs go, low paying jobs remain, low demand, low GDP

101
Q

Explain the national defense argument for restricting trade.

A

suitable industrial structure is desired in event of war

102
Q

Explain the infant-industry argument for restricting trade.

A

during start up period an industry may need protection from foreign competition

103
Q

What are the two exchanges that occur when a foreign good is purchased?

A

an exchange of currencies, and an exchange of domestic currency for the domestic good

104
Q

What does inflation do to currency?

A

depreciates (gets weaker)

105
Q

What is the Theory of Purchasing Power Parity?

A

ER (exchange rates) adjust to reflect differences in price levels btwn 2 countries; based on trade of goods, a long run influence on ERs

106
Q

Explain fixed exchange rates.

A

ER ceiling; currency in intentionally undervalued, encourage exports, maintained by central bank purchases of foreign reserves

107
Q

What is an example of fixed exchange and what were some problems?

A

gold standard; more gold flowed out than in, gold supply inadequate, countries can’t control money supply

108
Q

How do the feds control the ER?

A

too strong: increase supply of $ in foreign markets; too weak: reduce supply $ in foreign exchange market

Econ 201 (2 decks)

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