MACROECONOMICS 2

Question 1

Money

Answer 1

the set of assets in an economy that people regularly use to buy goods and services from other people

Question 2

Asset

Answer 2

anything of value owned by a person or a firm

Question 3

Bartering economies

Answer 3

economies where goods and services are traded directly for other goods and services

Question 4

Medium of exchange

Answer 4

an item that buyers give to sellers when they want to purchase goods and services

Question 5

Unit of account

Answer 5

the yardstick people use to post prices and record debts

Question 6

Store of value

Answer 6

an item that people can use to transfer purchasing power from the present to the future

Question 7

Liquidity

Answer 7

the ease with which an asset can be converted into the economy’s medium of exchange

Question 8

Commodity money

Answer 8

money that takes the form of a commodity with intrinsic value

Question 9

Fiat money

Answer 9

money without intrinsic value that is used as money by government decree

Question 10

Currency

Answer 10

the paper bills and coins in the hands of the public

Question 10

Demand deposits

Answer 10

balances in bank accounts that depositors can access on demand by writing a check

Question 11

Federal Reserve (Fed)

Answer 11

the central bank of the United States

Question 11

Central bank

Answer 11

an institution designed to oversee the banking system and regular the quantity of money in the economy

Question 12

Money supply

Answer 12

the quantity of money available in the economy

Question 12

Monetary policy

Answer 12

the setting of the money supply by policymakers in the central bank

Question 13

Reserves

Answer 13

deposits that banks have received but have not loaned out

Question 14

Fractional reserve banking

Answer 14

a banking system in which banks hold only a fraction of deposits as reserves

Question 15

Reserve ratio

Answer 15

the fraction of deposits that banks hold as reserves

Question 16

Money multiplier

Answer 16

the amount of money the banking system generates with each dollar of reserves

Question 17

Bank capital

Answer 17

the resources a bank’s owners have put into the institution

Question 18

Leverage

Answer 18

the use of borrowed money to supplement existing funds for purposes of investment

Question 19

Leverage ratio

Answer 19

the ratio of assets to bank capital

Question 20

Capital requirement

Answer 20

a government regulation specifying a minimum amount of bank capital

Question 21

Open-market operations

Answer 21

the purchase and sale of U.S. government bonds by the Fed

Question 22

Discount rate

Answer 22

the interest rate on the loans that the Fed makes to banks

Question 23

Reserve requirements

Answer 23

regulations on the minimum amount of reserves that banks must hold against deposits

Question 24

Federal funds rate

Answer 24

the interest rate at which banks make overnight loans to one another

Question 25

Quantity theory of money

Answer 25

a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate

Question 26

Nominal variables

Answer 26

variables measured in monetary units

Question 27

Real variables

Answer 27

variables measured in physical units

Question 28

Classical dichotomy

Answer 28

the theoretical separation of nominal variables and real variables

Question 29

Monetary neutrality

Answer 29

the proposition that changes in the money supply do not affect real variables

Question 30

Velocity of money

Answer 30

the rate at which money changes hands

Question 31

Quantity of equation

Answer 31

the equation M x V = P x Y, which relates the quantity of money, the velocity of money, and the dollar value of the economy’s output of goods and services

Question 32

Hyperinflation

Answer 32

inflation occurring at a very high rate, in excess of 50% per month

Question 33

Inflation tax

Answer 33

the revenue the government raises by creating money

Question 34

Fisher effect

Answer 34

the one-for-one adjustment of the nominal interest rate to the inflation rate

Question 35

Shoeleather costs

Answer 35

the resources wasted when inflation encourages people to reduce their money holdings

Question 36

Menu costs

Answer 36

the costs of changing prices

Question 37

Deflation

Answer 37

a reduction in the price level

Question 38

Business cycle

Answer 38

alternating periods of the economy expanding and contracting

Question 39

Expansion

Answer 39

a period of rising real incomes and falling unemployment

Question 40

Recession

Answer 40

period of declining real incomes and rising unemployment

Question 41

Depression

Answer 41

a severe recession

Question 42

Model of aggregate demand and aggregate supply

Answer 42

the model that most economists use to explain short-run fluctuations in economy activity around its long-run trend

Question 43

Aggregate-demand curve

Answer 43

a curve that shows the quantity of goods and services that households, firms, the government, and customers abroad want to buy at each price level

Question 44

Aggregate-supply curve

Answer 44

a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level

Question 45

Natural level of output

Answer 45

the production of goods and services that an economy achieves in the long run when employment is at its normal rate

Question 46

Stagflation

Answer 46

a period of falling output and rising prices