Final Flashcards
0
Q
Why the movement from commodity money to fiat money?
A
As an economy grows it needs more money.
1
Q
What is the definition of money?
A
Anything people accept in exchange for goods
2
Q
What is greshams law?
A
Bad money drives out good money.
3
Q
What is barter?
A
Good exchanges for goods
4
Q
What makes money better than barter?
A
Producers have more time to produce rather than spending time on trading
5
Q
What is the function of money?
A
Medium of exchange, standard unit for quoting prices
6
Q
What is commodity money?
A
Has use outside its function as money. I.e. Gold, silver
7
Q
What is fiduciary money?
A
Redeemable money, backed by commodity money
8
Q
What is fiat money?
A
Gov says its money, faith in issuer
9
Q
What is seigniorage?
A
Profit from printing money
10
Q
What is M1?
A
Measures the purchasing power immediately available to the public without borrowing or giving notice; readily spendable
11
Q
What are examples of M1?
A
Coins, paper money, checking, checks
12
Q
What is checking?
A
Demand account, converted to dollars “on demand”
13
Q
What is M2?
A
Contains components that are less liquid; M1, savings deposits and small time deposits
14
Q
What are savings deposits?
A
Interest bearing deposits that can be easily withdrawn
15
Q
What is the equation for M3?
A
M2 + large time deposits
16
Q
Why do we measure money?
A
Need to have just enough
17
Q
Explain first banks
A
Goldsmiths; gold on deposit for a receipt and served as fiduciary receipt
18
Q
What is fractional reserve banking?
A
Source of banks profits, increase the supply of money, where gold is reserved?
19
Q
If goldsmith fails what happens to money supply?
A
It rapidly contracts, receipts are no good
20
Q
Explain bank profits vs bank stability
A
High profits mean less stability and vice versa
21
Q
How do banks earn profits?
A
Fee for gold storage and interest on loans
22
Q
How to attract depositors?
A
No fee for deposits, create faith in bank
23
Q
How do banks stay stable and keep faith?
A
Keep enough reserves on hand to meet demands; make low risk loans
24
What are runs?
Depositors want their money back
25
What are low reserves?
Bank can't meet withdrawal demands
26
What are assets?
Owned by the bank
27
What are liabilities?
Owed by bank
28
What is a money multiplier?
Tells you the total increase in the money supply resulting from a deposit
29
What is the equation for money multiplier?
Money multiplier= 1/ reserve requirement(RR)
30
Reasons to control money supply?
Banks are out to make profits: can make inflation and recession worse
31
How can banks worsen recession?
Bad time for loans, contracts the money supply, less spending, recession worsens
32
How do banks worsen inflation?
Good time for loans, increase money supply, more spending, inflation worsens
33
What is the federal reserve system?
The Feds, bankers bank, corporation where members are shareholders and more like customers.
34
How is the fed quassi-public?
Financially independent, congress can influence through legislation
35
What part of the fed is out of politicians hands?
Printing press
36
What the Feds responsibilities?
Controls money supply, bankers bank- lender of last resort, determine reserve requirement, check clearing and prints notes
37
Who deals with minting coins and in charge of debt?
Treasury
38
What are the tools that the fed use to influence money supply?
Reserve requirement, discount rate, federal funding rate, and open market operations
39
What is the discount rate?
Rate at which banks borrow from fed to cover temporary deficiencies
40
What is the federal fund rate?
Rate at which banks borrow from one another
41
What is the open market operations?
Fed buys or sells treasury bills (ious)
42
How does fed use reserve requirements?
Affects banks excess reserves; lower requirement means more excess reserves, more loans, lower interest ( vice versa)
43
How does the Feds use discount rate?
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
How does the Feds use the fed funds rate?
What banks charge each other, rate is set by supply and demand
45
What is the prime rate?
Rate at which banks charge best customers; get best rate
46
What are t-bills?
Treasury bills- u.s. IOU, mature in 90,180, or 1 yr
47
How long until treasury bonds mature?
Up to 30 yrs
48
What do t-bills have?
Face value( at maturity); price (less than face value); return ( face value- price); rate of return (return/price)
49
What happens if fed buys t-bills?
T-bills demand rise, price raises, interest rate falls; other short term interest rates fall
50
What is the easy money policy?
Low interest( credit more available), fed increase money supply, lower fed funds rate, low interest rate for borrowing and saving
51
Easy money policy is a good time for what? Bad?
To borrow and spend and a bad time to save
52
Easy money policy is good to use during when?
A recession
53
What is tight money policy?
fed contracts money supply, fed sells t-bills, bank reserves decrease, banks charge higher interest rates; high interest rates on savings and borrowing
54
Tight money policy is good for when? bad?
good time to save, bad time to borrow and spend
55
Tight money policy is good to use during when?
inflation- less money in the banking industry, interest rates rise
56
What policy do you use to increase money supply? What way does the supply shift?
easy money policy; right
57
what policy do you use to decrease money supply? What way does the supply shift?
tight money policy; left
58
What are the two reasons firms and consumers hold dollars?
transaction purposes (buy things), and speculative purposes
59
what happens to demand if income rises?
more transactions, more money demand
60
what happens to demand if prices rise?
everything is more expensive, more money is needed to finance transactions
61
How do you make high interest rate go to equilibrium?
surplus of dollars that are converted to bonds, bond demand rises, bond prices rise, interest falls
62
How do you make low interest rate go to equilibrium?
shortage of dollars, means bonds are converted to dollars, bond demand falls, bond prices fall, interest rises
63
What happens if there is an increase in money supply?
supply shift, dollar surplus, conversion of bonds, bond prices rise and interest falls
64
What is the appropriate policy and monetary linkage to fight inflation?
Fed increases interest rates; higher rates means less borrowing and spending by consumers, lower spending means less upward pressure on prices
65
What does high GDP growth tell the Feds?
inflation is eminent bc resource utilization rises causing production costs and prices to rise
66
Why is the bond market concerned with inflation?
concerned with real interest rate; responds neg t good econ new; high GDP growth means inflation, then bond demand and prices falls
67
How does the Feds increasing interest rates affect stock markets?
higher interest rates increase corporate borrowing costs and reduce corp profits
68
What is the monetary policy in recession?
increase money supply (buy t-bills), lower interest rates (more borrowing and spending)
69
when does the monetary policy fail in recessions?
lose confidence from banks, firms, and consumers
70
what is a credit crunch?
banks are reluctant to lend in recession due to high risk; default risk
71
What is the monetary policy in a stagflation?
fight inflation with recession; contract money supply, interest rates rise; lower spending which reduces demand and prices, and demand and employment
72
what is the Keynesian argument for monetary policy?
policy is complex and can break and fail
73
What is the Monetarists view on monetary policy?
monetary policy is very effective; money supply increase, people spend it and demand rises
74
what is the monetarists equation?
M x V = P x Q
75
What do the values of the monetarists equation mean?
M= money supply, P= overall (avg) price lvl, Q= quantity produced, V= velocity of money
76
what is the velocity of money?
number of times in a year a dollar is used
77
With monetarists theory what happens if V is constant?
increase in M (more spending), high demand for Q, when Q is fully purchased-higher prices and inflation
78
What is fiscal policy?
gov taxing and spending; congress and pres
79
what is monetary policy?
control over the money supply and credit; feds
80
How does demand side theory correlate unemployment and inflation?
Low unemployment corresponds to high inflation and vice versa
81
What are the short run effects of gov reducing unemployment below the natural rate?
unemployment fall, wages and prices rise; eventually self corrects itself
82
What can we learn from the Phillips curve?
if unemployment falls below a certain level, inflation will rise quickly
83
What is budget deficit?
tax revenue is less than gov spending
84
What are the options the gov has for budget deficits?
raise taxes, print money, borrow
85
What is deficits?
borrowing in one year
86
what is debt?
accumulated deficits
87
What are the justifications for gov borrowing?
even tho mostly places a burden on future generations benefits their education and infrastructure; acts as an automatic stabilizer
88
How does the gov balance the budget?
reduce spending and increase taxes; recessionary, lower G, C, and I
89
What is the diff between gov and personal debt?
personal-backed by assets which limit personal borrowing; gov- not backed by assets, so they have unlimited borrowing ability
90
Who is most of the debt held buy? Why?
other gov agencies, insurance corps, foreigners; just want safe interest bearing assets
91
What are some debt issues?
tax consequences, debt monetization, twin deficits, crowding out
92
Explain the tax consequences of debt issues.
future generations are affected, interest payments limit fiscal policy
93
Explain the debt monetization of debt issues.
if fed increase its holding of T-bills during high deficits (high inflation)
94
Explain the Twin deficits of debt issues.
debt causes interest rates to rise, more foreign investment, stronger $, exports fall
95
Explain crowding out of debt issue.
gov causes higher interest rates, pool of savings has consumers drawing from it
96
Why do countries trade?
earth's resources are not evenly distributed
97
What is an absolute advantage?
a country can produce a good using fewer resources
98
What is a comparative advantage?
country produces less inefficiently relative to another country
99
What are ways to limit trade? what impact does it have?
quota- limit quantity imported; tariff- tax on an import; raises the price of imports
100
Explain how conservatives and liberal feel about job protection with restricting trade?
conservative: let inefficient go, frees resources for efficient industries; liberals- high paying jobs go, low paying jobs remain, low demand, low GDP
101
Explain the national defense argument for restricting trade.
suitable industrial structure is desired in event of war
102
Explain the infant-industry argument for restricting trade.
during start up period an industry may need protection from foreign competition
103
What are the two exchanges that occur when a foreign good is purchased?
an exchange of currencies, and an exchange of domestic currency for the domestic good
104
What does inflation do to currency?
depreciates (gets weaker)
105
What is the Theory of Purchasing Power Parity?
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
Explain fixed exchange rates.
ER ceiling; currency in intentionally undervalued, encourage exports, maintained by central bank purchases of foreign reserves
107
What is an example of fixed exchange and what were some problems?
gold standard; more gold flowed out than in, gold supply inadequate, countries can't control money supply
108
How do the feds control the ER?
too strong: increase supply of $ in foreign markets; too weak: reduce supply $ in foreign exchange market
