Money and the Federal Reserve Flashcards
<p>What are the 3 functions of money?</p>
<p>1) Medium of Exchange 2) Measure of Value 3)Store of value over time</p>
<p>What is the BARTER SYSTEM?</p>
<p>People exchange what they have for what they need. As long as society is simple</p>
<p>When is the barter system used?</p>
<p>when an economy collapses</p>
<p>What is COMMODITY MONEY?</p>
<p>when people in a region use a product as money (tobacco, cotton)</p>
<p>When does the commodity system work?</p>
<p>when the product is scarce.</p>
<p>What is commodity backed money?</p>
<p>when paper money and coin are backed up by some valuable comodity (gold or silver)</p>
<p>What is another name for commodity backed money?</p>
<p>Gold standard</p>
<p>What can commodity backed money save nation from?</p>
<p>Inflation</p>
<p>What is fiat money?</p>
<p>paper money and coin is backed by nothing</p>
<p>Why do we believe in the value of our money?</p>
<p>because our government has been stable for so many years</p>
<p>What MUST the government do with fiat money?</p>
<p>balance the money supply</p>
<p>What will too much paper money in circulation cause?</p>
<p>inflation</p>
<p>What willl too little money cause?</p>
<p>interest rates to rise. Then businesses won't borrow and new jobs wont be created</p>
<p>Who has primary responsibility for balancing the money supply?</p>
<p>the FED ,federal reserve</p>
<p>what do the board of govorners do?</p>
<p>they are appointed by the president and make decisions for the economy</p>
<p>what does the federal open market committee do?</p>
<p>supervises the trading of t-bonds </p>
<p>what does the federal advisory committee do?</p>
<p>offers advice, but has little power</p>
<p>how many federal reserve banks are there?</p>
<p>12 serves as a bank for commercial banks</p>
<p>what is monetary policy?</p>
<p>the decisions the board of governers makes to balance the money supply</p>
<p>what are the 4 decisions that the FED can make to balance the money supply?</p>
<p>1. Raise/lower the discount rate 2. raise/lower margin reserve requirement 3. sell/redeem treasury bonds 4. Moral suasion</p>
<p>What is the discount rate</p>
<p>the interest rate a commercial bank pays to a federal reserve bank</p>
<p>what is a prime rate</p>
<p>the interest rate we pay to a commercial bank</p>
<p>what does it mean to raise/lower the discount rate</p>
<p>IF THERE IS TOO MUCH MONEY the money supply has to be contracted: discount rate is raised, banks borrow less, prime rate is high, we borrow less</p>
<p>what does it mean to riase/lower the margin reserve requirement</p>
<p>TO CONTRACT THE MONEY SUPPLY: requiring commercial banks to keep a larger than normal percentage of their depositis in their regional FED bank</p>
<p>what does it mean to sell/redeem t-bonds?</p>
<p>TO CONTRACT THE MONEY SUPPLY: sell them at an attractive interst rate to take money out of circulation</p>
<p>what is moral suation?</p>
<p>when the board of governors asks congress for their help. Like raise taxes to contract money supply</p>
<p>What are commercial banks?</p>
<p>corporations trying to make a profit</p>
<p>what is economic growth?</p>
<p>increase in the number of goods/services avaliable in 1 years time</p>
<p>what does economic growth mean?</p>
<p>its good because it means that our standard of living is improving</p>
<p>what is economic growth caused by?</p>
<p>discovery of new resources or advances in technology</p>
<p>what is a nominal statistic?</p>
<p>raw data, collected info & no change</p>
<p>what is a real statistic?</p>
<p>adjusted statistic</p>
<p>what is the GDP?</p>
<p>gross domestic product- dollar value of all the final stuff produced in the US in 1 year</p>
<p>What is the GNP?</p>
<p>value of all final product produced by US companies operating all around the world</p>
<p>what is a good growth rate for the US per year?</p>
<p>4 percent</p>
<p>what is the NI?</p>
<p>national income- total earned income by all businesses in the US in 1 year</p>
<p>what is the PI?</p>
<p>personal income- sum of household income in US in 1 year</p>
<p>what is the DI?</p>
<p>disposable income- amount of income avaliable after taxes (what we actually get to spend)</p>
<p>what does the government do with the national income statistics?</p>
<p>determine if they need to expand/contract the money supply</p>
<p>What is the formula for GDP/GNP?</p>
<p>C + I + E + G = GDP or GNP</p>
<p>what is the "C" in the equation?</p>
<p>consumer sector: total dollar value of final consumer goods. Durable and non durable</p>
<p>what is the "I" in the equation?</p>
<p>investment sector: total dollar value of all final capital products produced for US businesses in 1 year</p>
<p>what is the "E" in the equation?</p>
<p>export sector: total dollar value of our net exports. Usually negative since we import more than we export. Called trade deficit</p>
<p>what is the "G" in the equation?</p>
<p>government sector: all product that the government purchases</p>
<p>what is the CPI?</p>
<p>consumer price index; measures inflation in consumer product every 3 months</p>
<p>what is the WPI?</p>
<p>wholesale price index; meausres rent per sq ft and hourly cost of labor</p>
<p>What are the 4 rates of inflation?</p>
<p>creeping, walking, running, hyper inflation</p>
<p>What are the 2 theories on the cause of inflation?</p>
<p>cost push theory and demand pull theory</p>
<p>What is the cost push theory?</p>
<p>production costs increase, "pushing" up retail prices</p>
<p>What is demand pull theory?</p>
<p>excessive consumer demand creates shortages of the product increasing its price</p>
