Money and Central Banks Flashcards
1
Q
What is a central bank ?
A
- Institution that controls an economy’s money supply
2
Q
What is money ? (for economists )
A
- Money is a narrow class of assets with special properties
- Money serves the economy as the medium of exchange, the unit of account, and a store of value.
3
Q
what is a medium of exchange ?
A
- it is whatever people use to purchase goods and services
4
Q
why people with substantial wealth usually hold only a small fraction of it in money ?
A
- The reason is that money yields a poor return compared to other assets, such as bonds
- Rich people keep most of their wealth in securities and real estate, but they keep enough in cash and checking accounts to buy groceries, pay for haircuts, and otherwise purchase the goods and services they desire
5
Q
what is Money demand ?
A
- It is the amount of wealth that people choose to hold in the form of money
6
Q
definition of barter :
A
- system of exchange in which goods and services are traded directly, with no money involved
7
Q
Double coincidence of wants :
A
- condition needed for barter in which each party to a transaction must have something the other wants
8
Q
what is Unit of account ?
A
- It is a measure in which prices and salaries are quoted
9
Q
Functions of money :
A
- Medium of exchange
- Unit of account
- store of value
10
Q
what is the meaning of “store of value” ? (money)
A
- It is a form wealth that can be held
11
Q
what is Commodity money ?
A
- It is a valuable good that serves as the medium of exchange
12
Q
what is Fiat money ?
A
- It is money with no intrinsic value
13
Q
types of money ?
A
- Commodity money
- Fiat money
14
Q
what is Dollarization?
A
- It is the use of a foreign currency (often U.S. dollars) as money
- any currency with low inflation and macro stable can be take as medium of exchange
15
Q
what is a “Currency board”?
A
- It is an institution that issues money backed by a foreign currency
16
Q
what is Currency union ?
A
It is a group of countries with a common currency
17
Q
how a money fiat system might break down ? (general)
A
- If everybody else refuses to accept money, then you will too
- ex: Uzbeks would accept U.S. currency for goods and services only if it was clean and unwrinkled, each person turned down worn bills because every- body else did.
18
Q
what is “Money supply”?
A
- total amount of money in the economy
19
Q
what is Monetary aggregate ?
A
- measure of the money supply (M1 or M2)
20
Q
what is M1 ?
A
- the Federal Reserve’s primary measure of the money supply; the sum of currency held by the nonbank public, checking deposits, and traveler’s checks
- The idea behind M1 is that money is the medium of exchange (use in the daily basis)
21
Q
formula of the M1 ?
A
M1 = currency + checking deposits + traveler’s checks
22
Q
what is a payments system ?
A
- It is an arrangements through which money reaches the sellers of goods and services
23
Q
what is the meaning of Stored-value card ?
A
- It is a card issued with a prepaid balance that can be used for purchases
24
Q
what is E-money ?
A
- funds in an electronic account used for Internet purchases
25
what is Liquidity ?
* How ease is the trading of an asset for money
26
what is M2 ?
* It is a broad measure of the money supply that includes M1 and other highly liquid assets (savings deposits, small time deposits, and retail money-market mutual funds)
27
how the Fed treat the money-market deposit account (MMDA) ?
- The Fed treats MMDAs as savings rather than checking accounts, so they are included in M2 but not in M1.
- The existence of MMDAs blurs the line between checking and savings deposits because it is possible to write checks on MMDAs. However, depositors are limited to six checks a month, and people don’t make pur- chases with MMDAs very often
28
what is Sweep program in financial terms ?
* banking practice of shifting funds temporarily from customers’ checking accounts to money-market deposit accounts (MMDAs) checking accounts---------\> (MMDAs)
* The Fed requires banks to hold reserves equal to a certain percentage of their total checking deposits
* MMDAs have no reserve requirements, so moving funds from checking accounts to MMDAs reduces a bank’s required level of reserves
* Most consumers are unaware that their checking deposits may be swept into other accounts
* Consumer ignorance of the practice doesn’t matter, as funds that are swept out of checking accounts are always swept back in when they are needed.
29
Functions of Central Banks :
1. Clearing checks and electronic payments
2. Monetary policy (managing the money supply)
3. Emergency lending
4. Financial regulation
30
Definition of Monetary policy : (financial term)
- central banks’ management of the money supply
31
Meaning of "Lender of last resort" :
- central bank’s role as emergency lender to financial institutions
32
why the attacks on the World Trade Center and the Pentagon immediately interrupted the payments system?(U.S.A)
* airplanes were grounded, checks stopped traveling among banks
* In addition, the attacks knocked out electronic communications in Manhattan’s financial district
33
what effect after a breakdown in payments ? (banks) (crisis)
- domino effect:
1. banks did not receive payments they expected and ran short of money
2. they delay payments and refuse to make loans.
3. other banks don’t receive expected funds
4. Everybody starts hoarding money
5. payments system can break down.
34
how the Fed (USA) prevent a Domino effect after a breakdown ? (11/9)
* The Fed adjusted the rules governing payments
* The Fed acted as a lender of last resort
* The Fed relaxed bank regulations
35
Degrees of Liquidity: graph
