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Economics > Money and Banking > Flashcards

Money and Banking Flashcards

1
Q

what is the price level

A

the overall rate of prices in an economy, measured by GDP deflator or consumer price index

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2
Q

what is consumer price index

A

measuring of the prices that matter to consumers eg groceries, education, household goods

doesnt include tech goods, pharmaceutical goods produced in a country unlikee GDP

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3
Q

what is inflation

A

the steady rise of prices over time

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4
Q

what does nominal mean

A

the total value of transactions

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5
Q

what does real mean

A

total value of transactions, controlling changes in price

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6
Q

how to calculate GDP deflator

A

nominal GDP / real GDP * 100

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7
Q

in the base year what will the GDP deflator always be

A

100

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8
Q

what is wealth

A

any value that is stored up

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9
Q

example of stock wealth

A

loans, site of land, share in a firm

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10
Q

example of flow wealth

A

interest payments, rent, income

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11
Q

what are the 2 types of financial systems

A

financial market

financial intermediaries

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12
Q

what do financial systems do

A

match one persons savings with another persons investment

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13
Q

example of financial market

A

stock and bond market

direct interaction between savers and borrowers

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14
Q

example of financial intermediaries

A

banks

indirect interaction between savers and borrowers

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15
Q

4 main forms of financial wealth

A

property and real estate
equities
bonds
cash

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16
Q

what is an equity

A

partial ownership in a public firm

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17
Q

what is the most liquid form of wealth

A

cash

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18
Q

some unusual forms of wealth that are difficult to measyre

A

art
cars
natural materials

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19
Q

define money

A

the assets in an economy that people regularly use to buy goods and services

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20
Q

3 functions of money

A

medium of exchange
unit of account
store of value

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21
Q

what does it mean to be a medium of exchange

A

turn your stock of wealth into everyday good and services

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22
Q

what does it mean to be a unit of account

A

measureable

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23
Q

what does it mean to be a store of value

A

purchasing power from present to future exists, ie £1 of money is worth £1 in futre

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24
Q

why might bitCoin not be considered money

A

it isn’t a medium of exchange

too volatile to be a store of value

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25
what is fractional reserve banking
banks hold a fraction of the deposits and lend out the rest
26
what are liabilities in banks
depsoits, what the bank owes people
27
what are assets in banks
loans, what the people owe the bank
28
what is a reserve rati
the fraction of deposits that the bank holds as reserves
29
formula for money multiplier
1/r
30
who controls the reserve ratio
the central bank | control of supply of money
31
what is a credit risk
the probability that the borrower will fail to pay some of the interest or principle
32
what is sovereign debt
when governments borrow money to finance public spendinf
33
what does it mean when a form of wealth has intrinsic value
the item would have value even if not used as money eg gold, jewellery
34
what is fiat money
money that doesn;t have intrinsic value and is only used as money because the government says sp
35
what is money stock
the quantity of money circulating in the economy
36
what are central banks
institutions designed to regulate the quantity of money in the economy
37
what is monetary policy
set of actions taken by the central bank to affect the money supply
38
if the interest rate is higher, do people want to save or spend their money
save | increase opportunity cost in holding money
39
Demand of money depends on what
interest rates
40
what is the relationship between interest rates and demand for money
negative relationship as interest rates go up, demand for money falls as people don't want to hold as much money
41
what is the central bank in America called
Federal reserve
42
what is the central bank in europe called
European central bank
43
what are the three main tools that central banks use to affect money supply
1. changing reserve ratio 2. changing the refinancing rate 3. open market operations
44
when there is a higher reserve ratio, is more or less money created
less
45
what is the refinancing rate
the rate at which the central bank lends to the private banks
46
does a higher refinancing rate increase or decrease money supply
decrease as it is harder to borrow money
47
how can the central bank take money out of circulation
selling government bonds in exchange for cash
48
how can the central bank put more money into circulation
buying government bonds in exchange for cash
49
two main roles of central bank
1. price stability (keeping inflation low) | 2. smoothing cycles
50
what percentage do central banks like to keep inflation at
2%
51
can interest rate affect GDP
yes
52
how does interest rate affect GDP
GDP = C(r) + I(r) + G(r) + NX(r) r reflects cost of borrowing, borrowing is cheaper when r is low and more expensive when r is high
53
when interest rates fall does aggregate demand increse or decrease
increase
54
what is the dual mandate of the FED
price stability & full employment
55
why might a dual mandate be diffciult
increasing output and lowering unemployment means there must be a rise in prices but a rise in prices goes against the price stability mandadte the reverse is also truewha
56
what is helicopter money
unlimited money supply continues to be dropped into the economy
57
why are interest rates cut during a crisis
encourages borrowing and investing will shift AD curve out in aim to bring back to long run gowth
58
what is a zero lower bound
when the CB are limited in reducing the interest rate because they cannot have a negative interest rate
59
what is the money multiplier
how much money the banking system can create with each euro of reserves
60
where is ECB HQ
Frankfurt, Germany
61
if the CB wanted to increase the money supply, how would they change reserve requirements
decrease reserve requirement
62
if the CB wanted to decrease the money supply, how would they change reserve requirements
increase reserve requirement
63
what is the discount rate./ policy rate
the rate at which the CB lends to the private banks
64
if the CB wanted to decrease the money supply, how would they change discount rates
increase discount rate
65
if the CB wanted to increase the money supply, how would they change discount rates
decrease discount rates making it eaier to borrow
66
in an expansionary period, why is there a low interest rate
cheaper to borrow == more investment more consumption
67
does monetary policy work in the long run
no, monetary policy only deals with the short run
68
what happens to AD when bubbles pop
shifts to the left
69
what is a deficit
Spending more money than generated in revenue
70
what is debt
accumulation of defecits
71
what can help slow down debt
surplus
72
should debt be looked at on its own or as a percentage of GDP
as a percentage of GDP, making it easier to compare countries
73
what does the ECB say the debt percentage of GDP is too high
60%
74
how can debt be decreased using fiscal policy
``` increase taxes use government revenue to reduce deficit (eg USCI) cut government spending bailout options ```
75
when is debt sustainable
if the growth rate of the economy is greater than the interest rate
76
what is the emergency European Stability Mechanism
the EU restructures loans at a much lower interest rate
77
Describe a change in the tax system that might increase private saving.
To encourage people to invest in a pension early by offering a certain growth percentage on pension savings through the government would mean the government would have to spend less on state pensions
78
is supply of money elastic
no inelastic
79
how many member states in ECB
27
80
Why is it important for central banks to maintain price stability
economy works best when prices are stable if prices are constantly falling and rising, peeople will wait for prices to fall before they buy goods and services

Economics (25 decks)

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