Unit 3 Flashcards
MI
Currency + Checking Accounts + Savings Accounts
M2
M1 + Time Deposits(like CD) + Money Markey Mutual Funds
Bank
Any institution that takes in deposits and makes loans
Run on a Bank
When most people TRY to take out all their money at the same time
In which history phase of money is money exchangeable for gold?
Gold-Backed Money (Gold Standard)
In which history phase was money valuable as a product and money?
Commodity Money (like gold coins)
In which history phase was money a “paper” currency that stands on the strength of the economy?
Free Standing Money (like US dollars)
What type of money is used most commonly now-a-days which has little to no physical form?
Electronic Money
Credit Cards are not money- Why?
it is a short term loan
Which of the following are examples of the “medium of exchange” function of money?
I. Putting money in the bank
II. A shirt costing $40
III. Paying for a purchase with a check
IV. A loan
V. Purchasing a car in full
VI. A paycheck
III. & V.
Which of the following are examples of the “Store of Value” function of money?
I. Putting money in the bank
II. A shirt costing $40
III. Paying for a purchase with a check
IV. A loan
V. Purchasing a car in full
VI. A paycheck
I. & VI.
Which of the following are examples of the “Standard of Measurement” function of money?
I. Putting money in the bank
II. A shirt costing $40
III. Paying for a purchase with a check
IV. A loan
V. Purchasing a car in full
VI. A paycheck
II.
Which of the following are examples of the “Standard of Deferred Payment” function of money?
I. Putting money in the bank
II. A shirt costing $40
III. Paying for a purchase with a check
IV. A loan
V. Purchasing a car in full
VI. A Paycheck
IV.
What are the functions of the Chair of the Board of Governors? (E.C.)
Goes before Congress twice a year
Is the public face for the federal reserve
What are the functions of the Board of Governors?
Appointed by the president and confirmed by the Senate
What are the functions of the Federal Reserve Banks
- Clears checks
- Replaces old money
- Inspects banks in the district
- Reports on the economic well being of the district
- Holds the reserves for each member bank
What are the Roles of the Member Banks?
Monetary Policy changes
What are the functions of the Federal Open Market?
19 total members 12 of which are voting members
7 Board of Governor’s plus 5 Reserve Bank Presidents (New York President and 4 other rotate)
What is the monetary policy role of the Federal reserve?
Carries our Federal Reserve Policies
What is the policy role of the Federal Open Market Committee?
Sets policy on open markey operations
What is the policy roles of Board of Governors?
Able to set most policiy for the Federal Reserve
What is the policy roles of the Chair of the Board of Governors?
They Set the agenda and range for Federal Reserve Policy
What is the function that the Federal Reserve Bank perform for their members?
I. Inspect banks
II. Carry out monetary policy changes
III. Replace old money
I and III
What is the Classical View of the economy in general?
The economy is stable and moves to full production in the long run
Which statement(s) about the make-up of the Open Market Committee is (are) correct?
I. There are 9 Board of Governors
II. The New York Federal Bank President always vote
III. There are 12 voting members
II and III
Which statement(s) about the make-up of the Open Market Committee is (are) correct?
I. There are 9 Board of Governors
II. The New York Federal Bank President always vote
III. There are 12 voting members
II and III
If the Federal Reserve wants to change the Reserve Requirement, what role does each of the following play in the process?
The Board of Governors
Is able to set the policy
If the Federal Reserve wants to change the Reserve Requirement, what role does each of the following play in the process?
The Member Bank
Have their activities changes
If the Federal Reserve wants to change the Reserve Requirement, what role does each of the following play in the process?
The Federal Reserve Banks
Carries out the policy
How does the economy grow according to a Classical view point?
Saving to Investment to LRAS grows
What are the two assumptions about the Equation of Exchange?
“Q” had to constant since the economy was always at full production
“V” was constant due to technology changing slowly during this time period
What are the 3 outcomes?
- In the long run, full employment
- in the long run, full profuction
- LRAS is vertical
by wages & prices flexing [blank] it removes a [surplus]
downward
by wages & prices flexing [blank] it removes a [shortage]
upward
Why is the Federal Reserve semi-public and semi-private
the Board of Governors is public
all other employees are private
Central bank functions are split into two what is the U.S. Treasury
handles all financial transactions for the U.S. government
Central bank functions are split into two what is the Federal Reserve
handles all the money supply and any economic policies that relate to the money supply
Why should the Federal Reserve be Independent or not ? pick a side
Pro- Independence
1. The Federal Reserve should remain free from any political pressure. Their decisions should be based purly on economic needs. The current system isolates the FED from pressure by either the President or Congress
2. The Federal Reserve should be run by people who are qualified to do the job. They must have the abilities to understand economic conditions and the policies needed to address those conditions
What are the tools of the Fed (Sh.A)
- Reserve requirment
2.pen market operations - Discount rate
- Federal funds rate
current discount rate vs recession
5.5-5.75%
0%- 5%
reserve requirment
RR goes up→ LF goes down→ #of loans goes down→ MS goes down→ i rates goes up (vice-versa)
RR: Reserve requirement
LF: Loan funds
MS: money supply
Open Market Operations
(fed view) buy bonds→ deposits go up→LF goes up → # of loans go up→ MS goes up→ i rates go down
Discount rate
DR goes up→ borrow less reserves → LF goes down→ # loans goes down→ ms goes down→ i rates go up
Federal funds rate(FFR)
FED comes in on the buying side→ demand and supply for fed funds → FFR goes up
if FFR goes up → other i rates go up
How does the classical model view the government?
Negative view of govt’ intervention in the economy
What does the classical model say the 3 roles of government are
- Legal system
- National Defense
- Promoting competition
Say’s Law
Supply creates its own demand
What does say’s law imply?
- Supply will create an equal demand
- The economy will have stable long run growth
How does the economy grow? according to classical model?
saving→ investment → LRAS grows
S increases → LRAS would grow fast
Assumption of flexible interest rates
No matter how the saving curve or investment curve shift, i rates will flex to keep S=I of full production
Velocity
of transactions $ makes in a year
Transaction
demand for money
What happens if M goes up
M increases= inflation
What happens if M goes down
Deflation
What happens if M changes?
P will change in the same direction
Keynesian Criticism? E.C.
- Attack flexible wages and prices. W&P will flex upward but resist flexing down. Society has become more urban and interdependent, so people/businesses depends more on wages/ prices
- S=I may not be at full production
S =savings
I
Efficient wage theory. Why W? (E.C.)ƒstr
- Firm gets more motivated and productive workers
- Ready replacement pool of workers
Autonomous consumption
Spending independent of income
Consumption function
what does the 45* show?
Shows all possible equilibrium points
Factors that can shift Autonomous consumption
- Wealth goes up → auto c goes up
- Debt
- short term → auto c goes up
- long-term→ auto c goes down - Household age and size
age up → auto c down
size down → auto c down - expectations
good exp → auto c goes up
bad exp future → auto c goes down
Pro Fed Argument
- the federal reserve should remain free from any political pressure. Their decisions should be based purely on economic needs. The current system isolates the FEED from pressure from the legislative or executive branch.
- The federal reserve should be run by people who are qualified to do the job. They must have the abilities to understand economic conditions and the policies needed to address those conditions.
