Unit 4 Flashcards
Barter System
Goods and services are traders directly. No money or currency exchanged.
Barter system issues
Before trade could occur each trader had to have something the other wanted. This is called the “double coincidence of wants”
Some goods cannot be split. If one goat is worth 5 chickens how do you exchange if you want 1 chicken
Money
Anything that is generally accepted in payment for goods and services. NOT the same as wealth or income.
Wealth
Total collection of assets
Income
Flow of earnings per unit of time
3 functions of money
1) medium of exchange
2) unit of account (money acts as a measurement of value)
3) Store of value ( money allows you to store purchasing power for the future.
Commodity money
Something that performs the function of money and has intrinsic value
Intrinsic
Essential/valuable on its on
Gold, cows
Representative money
Signifies ownership of valuable goods but have no intrinsic value
Ex) checks, treasury note
Fiat money
Something that serves as money but had no other value or uses
Ex) paper money, coins, digital currency
IS NOT a source of intrinsic value
Inflation increases …..
Rapid inflation…..
Inflation increase decrease purchasing power
Rapid inflation decreases acceptability
Gold standard
Money is gold abandoned in Great Depression
Liquidity
Ease with which an asset can be accessed and used as a medium of exchange
M1
HIGHEST LIQUIDITY
- currency in circulation (money in pocket)
- checkable bank deposits (checking accounts)
- travelers checks
M2
NEAR MONEYS
- savings depositions
- time deposits (COs =certificates of deposit)
- Money market funds
-INCLUDES EVERYTHING INSIDE M1
M1 and M2 often hold…?
Little to no interest so the opportunity cost of holding liquid money is the interest you could be earning.
MB (Monetary Base)
Sometimes Mo
MORE LIQUID THAN M1
-currency in circulation
-bank reserves
THIS IS WHAT THE FEDERAL RESERVE MANIPULATES TO GROW M1 OR M2
Financial Sector
Network of institutions that link borrowers and lenders including banks, mutual funds, pension funds, and other financial intermediaries
Assets
Anything tangible or intangible that is owned
Liability
Anything that is owed
Loan
An agreement between a lender and a borrower usually at a fee called the interest rate
ASSET LENDER, LIABILITY BORROWER
Fractional Reserve Banking
When banks hold only a small portion of deposits to cover potential withdrawals and then loans the rest of the money out
Demand deposits
Money deposited in a commercial bank in a checking account
Required reserves
Bank must hold 10% of money by law
Excess reserves
Amount the bank can loan out
Effects on money supply (change)
1) banks make more loans
2) fed reserve creates new reserves
MONEY POCKET TO BANK= NO CHANGE
MONEY BANK TO BANK= NO CHANGE
Deposit expansion multiplier
1/rr
Creation of new money (formula)
Excess reserves x multiplier
Required reserves
Required Reserves x Deposits
Who runs the fed reserve
The board of governors(14 year term)
Decisions are not sent to president or congress for approval.
Bank run
When people lose faith in the security of the bank and rush to withdraw all their money at once
Lead to financial panics
People stop spending > loans hard to get>credit drys up, halting economy> bank runs out of people’s money
As discount rate changes how does it effect money supply
Decreased rate, increased MS
Increased rate, decreased MS
Opening market operations effect on money supply
Buying bonds, increase MS
Selling bonds, decrease MS
Money market demand shifters
1) changes in PL
2) changes in income
3) changes in technology
Transaction demand for $
People hold $ for everyday transactions
Asset demand for $
People hold $ since it’s less risky than other assets
If Interest rates increase the want to hold money (cash) will…
Decrease
Relationship between interest rates and investment spending
Inverse
Increasing the money supply during a recession…
EXPANSIONARY
increases AD, interest rates fall
Decreasing money supply….
Temporary shortage of money will occur at 5% interest. This shortage will cause interest rates to rise to 10%
This decreases AD
Real interest rate
% increase in purchasing power that a borrower pays (adjusted for inflation)
NoMinsk interest rate
% increase in money that the borrower pays not adjusted for inflation
Real interest rate + expected inflation
Loanable funds market demand shifters
1)Change in perceived business opportunities
a) consumer confidence in economy
b) tax credits
2)Changes in govt borrowing
(Budget deficit or surplus)
Inverse relationship between real interest rate and quantity loans demanded
Loanable funds market supply shifters
1) change in savings
2) changes in foreign investments
3) change in expected profitability
a) gov taxes on interest
b) fed buy/sell bonds
Direct relationship between interest and quantity loans supplied
What if gov increases deficit spending
Real interest rates cause CROWDING OUT
Investments fall
Quantity theory of money
M x V = P x Q
M=supply of money
V= velocity of money
P= PL
Q= output/RGDP/Y
Short run Phillips curve
Inverse relationship
Dot moves along line (SRPC)
Shift left: increase AS
shift right: decrease AS
Stagflation: SRPC curve moves right
Long run Phillips curve
Shift left
- decrease Un
- gov investment in human capital decrease
Shift right
- increase natural rate of unemployment (Un)
- gov investment in human capital increase
