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1
Q

What three functions does money serve?

A

medium of exchange, unit of account/standard of value, store of value/wealth

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2
Q

What does an economist mean when he/she talks about M1, M2, and M3?

A

M1- currency and coins, checkable deposits.
M2- M1 plus savings accounts, small time deposits, money market mutual funds.
M3- M2 plus large time deposits.

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3
Q

What is the transactional demand for money?

A

money is used as a medium of exchange, not affected by interest rates

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4
Q

What is the asset demand for money?

A

money as a store of value, varies with the interest rate

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5
Q

How are transactional and asset demand related to changes in the interest rates?

A

transactional is not affected by interest rates

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6
Q

How do the money (financial) markets determine an equilibrium interest rate?

A

where transactional demand and asset demand meet

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7
Q

What are financial intermediaries?

A

firms that take funds received from depositors and lends the funds to third parties

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8
Q

What are some examples of financial intermediaries?

A

banks, savings and loan associations, credit unions, mutual savings banks

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9
Q

What are the three main purposes of a central bank?

A

issue a common currency, depository of federal government funds, control bank lending and the money supply

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10
Q

What was the 1913 Glas-Owen Bill?

A

established the 12 federal bank districts with the 7-member board of governors

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11
Q

What is the Federal Reserve System (FED), and why is it important to monetary policy?

A

our solution to our lack of a central bank, compromise between state and national govt

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12
Q

What are the major parts of the FED?

A

board of governors, federal open market committee, 12 federal reserve banks, commercial banks, thrift institutions

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13
Q

Where is the Federal Reserve Bank that serves Ohio located?

A

Cleveland

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14
Q

What is the difference between federal chartered bank and a state chartered bank?

A

state chartered banks are authorized to operate by state governments

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15
Q

What agencies regulate nationally chartered banks?

A

federal government, FDIC

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16
Q

What are the functions of the FED?

A

regulate money supply, supervise commercial banks, issue currency, act as a banker’s bank, provide for check collection

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17
Q

What is a bank’s balance sheet?

A

A = L + OE

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18
Q

What are the major assets of an average bank?

A

loans and securities

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19
Q

What are the major liabilities of an average bank?

A

savings and time deposits, demand deposits

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20
Q

What is a fractional reserve system?

A

financial intermediaries maintain reserves equal to only a portion of their deposits

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21
Q

What is a primary deposit?

A

represents new reserves brought into the banking system

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22
Q

What do we mean when we say that a bank “creates” money?

A

by making loans

23
Q

What are reserve requirements, required reserves, and excess reserves?

A

reserve requirements- percent of primary deposits banks must keep on reserve.
excess reserves- dollar amount of reserves that are kept above the required resources

24
Q

Where do banks keep their required reserves?

A

with the FED or as vault cash

25
What is the monetary multiplier, and how does it affect the money-creation process?
1 over the required reserve ratio
26
What is the role of interest rates in monetary policy?
either stimulate or to slow down economic activity
27
What is the difference between the discount rate, the federal funds rate, and the prime interest rate?
discount rate- rate that federal reserve charges banks for borrowing money to meet their cash reserve requirement. fed funds rate- rate that banks charge other banks when they borrow funds to meet their cash reserve requirement. prime interest rate- rate that a bank charges its most credit worthy customers.
28
What are the three major tools of monetary policy and how do they affect the money supply?
reserve ratio requirement, discount rate, federal open market operations
29
How would each of these tools be used during a recession?
decrease reserve requirements decrease discount rate buy govt securities from the public
30
How would each of these tools be used during an expansionary period?
increase reserve requirements increase discount rate sell govt securities to the public
31
Which monetary tool is used most often and why?
federal open market operations, no idea why
32
What are the major advantages of using monetary policy rather than fiscal policy?
speedier and more flexible than fiscal policy isolation from political pressure may be more effective than fiscal policy
33
What are the shortcomings of monetary policy over fiscal policy?
does not stop cost-push inflation change in interest rates may not affect investment spending cannot control both money supply and interest rates at the same time
34
Who was Milton Friedman, and what is the main belief of monetarist?
economist, believed that the government is the reason markets dont always work
35
What is the “monetary rule” offered by monetarist?
constant growth of the money supply
36
What relationship does the Phillips curve hold between inflation and unemployment?
there is a trade-off between the rate of inflation and the rate of unemployment
37
What is stagflation, and how does it contradict the Phillips curve?
combination of high interest rates and high unemployment, no trade-off as both were high
38
What were the possible solutions to the stagflation of the 1970s?
traditional Keynesian Fiscal Policy and/or Monetary Policy wage and price guidelines wage and price controls tax-based income policy
39
What were the major economic “shocks” that occurred in the United States in the 1970s that caused stagflation to occur?
increase in energy prices increase in food prices increased price of imports increase in wages
40
What events in the early 1980s helped to reduce stagflation?
severe recession reduced FED increased interest rates increase in foreign competition kept a lid on wage and price increases decrease in OPEC's power reduced energy costs
41
What were the major goals of supply-side economics (Reaganomics) offered by President Reagan?
decrease govt growth, govt regulation, negative work incentives, and tax rates
42
What is the Laffer curve, and what did it suggest about the tax rates during the 1980s?
shows relationship between tax rate and tax revenue
43
What were the major problems of Reaganomics that occurred when it was used in the 1980s?
tax cuts were too large and actually reduced govt revenue | increase in military spending, but without cuts in welfare programs, increased govt spending
44
What are the three major philosophies on the federal budget and how do they differ?
cyclically balanced budget- federal budget balanced over business cycle functional finance- prioritized govt goals annually balanced budget- fed budget balanced each fiscal year
45
Why is a cyclically balanced budget considered to be counter-cyclical?
if GDP is down, govt spending goes up
46
What was the Humphrey-Hawkins Bill of 1978, and how does it relate to the functional finance philosophy of the federal budget?
prioritized govt goals: keep unemployment low, kept inflation low, and if possible balanced the budget
47
What was the Gramm-Rudman Act?
congressionial act required an annually balanced budget to be achieved within five years
48
What reasons do some people give to push for an annually balanced budget?
debt is a burden will not be able to make the payments or debt will be too large to repay deficit is a result of big govt, need to scale back large fed debt inrceases interest rates
49
Why is an annually balanced budget considered to be pro-cyclical?
in a recession, govt spending is forced down by the decrease in govt tax revenue - further decrease in economic activity and GDP
50
What did Adam Smith see as being important for economic growth to occur?
specialization of labor maintaining patterns of growth increasing capital deepening
51
What have been the main sources of growth for the United States in recent years?
technology advancement increase in quantity of capital education and training
52
Why was there a slowdown in U.S. growth from 1973 to 1995?
decrease in capital investment as a percent of GDP decrease in the rate of capital deepening decrease in labor quality due to influx of baby boomers lack of technological progress poor relationship between workers and management
53
What are some of the modern day problems of economic growth?
strain on the environment unequal income distribution a need to realize limits on growth can cause human obsolescence and job insecurity
54
What is the difference between conservative economists and liberal economists?
conservative- preference for market-based solutions, against govt interference, sees economic problems as a result of the govt liberals- market-based solutions are ok but imperfect, need to be modified not replaced, and sees govt actions as strengthening market solutions

macro final (1 decks)

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