Quiz 1

Question 1

Capitalism

Answer 1

financial system with private property and ownership

Question 2

Money and credit effects:

Answer 2

Output, expenditure, and level of economic activity

Question 3

Markets

Answer 3

2 people ready to trade, markets and money came before capitalism which transformed it

Question 4

Money

Answer 4

anything generally accepted in payment for goods and services or in repayment of debts

Question 5

Credit

Answer 5

promise to pay money, means of delaying final settlement

Question 6

Currency

Answer 6

One type of money, US dollars and coins, cannot be used interchangeably with money

Question 7

Income

Answer 7

flow of earnings per unit of time

Question 8

Wealth

Answer 8

A stock, some amount of money at a given point in time; includes other assets as well

Question 9

Accounting Model

Answer 9

Every agent/group in the economy is a kind of bank, in the sense that every agent attends to the inflow and outflow of cash balances

Question 10

Assets:

Answer 10

Loans, cash reserves, securities

Question 11

Liabilities

Answer 11

Deposit accounts, other borrowing, net worth

Question 12

Full reserve

Answer 12

each deposit 100% backed by cash reserves, banks keep the full amount of deposits in cash, ready for immediate withdrawal on demand

Question 13

Full reserve pros and cons

Answer 13

Pros: no systemic risk such as bank runs
Cons: lending/credit not possible

Question 14

Fractional reserve

Answer 14

Cash reserves are less than deposits, and banks make loans which increases the velocity of money

Question 15

Fractional reserve pros and cons

Answer 15

Pros: robust economy
cons: default, bank runs

Question 16

Velocity of money

Answer 16

The frequency at which one unit, of currency, is used to purchase goods and services within a given time period; the number of times one dollar is spent to buy goods and services per unit of time

Question 17

Neutral hierarchy of money

Answer 17

What looks like money at one level of the system looks like credit to level above it, gold standard, money and credit in terms of concrete financial instruments

Question 18

Credit to money

Answer 18

securities, deposits, currency, gold

Question 19

Gold

Answer 19

Ultimate money, ultimate international means of payment

Question 20

Currencies

Answer 20

A form of credit, promises to pay gold, more credible promise to pay because of presence of reserves

Question 21

Deposits

Answer 21

Promises to pay currency on demand, twice removed promises to pay ultimate money

Question 22

Securities

Answer 22

Promises to pay currency over some time horizon in the future, even more attenuated promises

Question 23

Currencies, deposits, securities

Answer 23

credibility of these promises is an issue, reserves of instruments that lie higher up in the hierarchy can help enhance credibility

Question 24

If no gold..

Answer 24

demand determines credibility

Question 25

Time has value

Answer 25

paying interest to compensate lender for time during which you use the funds

Question 26

Risk requires compensation

Answer 26

uncertainty is quantified

Question 27

Moral hazard

Answer 27

occurs after transaction, occurs when agent's action is private information- someone who is insured drives less carefully

Question 28

adverse selection

Answer 28

created by asymetric info before transaction occurs, occurs when agents type is private information- insurer does not know whether a driver is high or low risk

Question 29

Principal agent model

Answer 29

employee has full information about whether she is working hard (action) or her job skills (type)

Question 30

markets determine...

Answer 30

prices and allocate resources

Question 31

stability

Answer 31

because volatility creates risk, reducing volatility reduces risk-monetary policy

Question 32

4 prices of money

Answer 32

par, interest, exchange rate, price level

Question 33

par:

Answer 33

different types of money (currency, deposits) first price

Question 34

interest:

Answer 34

future money - money today in terms of money tomorrow

Question 35

exchange rate:

Answer 35

foreign money - domestic exchange, foreign economy

Question 36

price level:

Answer 36

commodities

Question 37

3 functions of money

Answer 37

Medium of exchange, unit of account, store of value

Question 38

liquidity

Answer 38

relative ease and speed with which an asset can be converted into medium of exchange-highly desirable

Question 39

Monetary aggregates

Answer 39

M1 and M2

Question 40

M1

Answer 40

currency at hands of public travelers checks demand deposits other checkable deposits

Question 41

M2

Answer 41

M1 small denomination time deposits saving deposits and money market deposit accounts retail money market mutual fund shares

Question 42

What would happen to M1 if there was a financial crisis

Answer 42

a spike in M1

Question 43

What would happen to M2 in inflation

Answer 43

high growth rate in M2

Question 44

doubling all prices means...

Answer 44

value of money has dropped half

Question 45

halving all prices means...

Answer 45

value of money has doubled

Question 46

Quality theory of money ASSUMPTIONS (4-did not include what each variable means)

Answer 46

V is constant full employment of resources (capital and labor) equilibrium and perfect competition M is exogenously determined

Question 47

Quality theory of money equation

Answer 47

MV=PT M : quantity of money (stock) V : velocity of money P : general price level T : transactions (GDP)

Question 48

Quantity theory of money STATEMENT (6)

Answer 48

MV=PT (equation of change) P is entirely determined by stock of money increase in M only effects P increase in M raises P equiproportionaltly T determined soley by real forces true in long run