Unit 5 Test Prep

Question 1

barter system

Answer 1

goods and services are traded directly
ex: a farmer trades pineapples to another farmer for broccoli

Question 2

money

Answer 2

anything that is generally accepted in payment for goods or services

Question 3

wealth

Answer 3

total collection of assets that store value

Question 4

income

Answer 4

a flow of earnings per unit of time

Question 5

commodity money

Answer 5

based on an item (silver, gold, diamond, shells, etc) that has value to a society

Question 6

representative money

Answer 6

something (usually paper currency) can be exchanged for something else (normally a precious metal)

Question 7

fiat money

Answer 7

somethign that serves as money but has no other important uses. the government says it has value, so it does

Question 8

scarce (limited supply)

Answer 8

money must not be easily reproduced

Question 9

portable

Answer 9

money must be easily transported

Question 10

divisible

Answer 10

easy to make change

Question 11

durable

Answer 11

something that will last a long time

Question 12

uniform

Answer 12

consistent in size and shape

Question 13

the board of governors

Answer 13

the FED is overseen by 7 board member board of governors. appointed by the president to 7 year terms

Question 14

federal reserve district

Answer 14

12 federal reserve districts with one federal reserve bank per district

Question 15

member banks

Answer 15

all banks (wells fargo, bank of america, etc). reports to the fed

Question 16

money creation

Answer 16

the process by which money enters circulation (loans)

Question 17

required reserve ratio

Answer 17

the money banks hold back and can not be loaned out

Question 18

money multiplier

Answer 18

1/rrr

Question 19

reducing RRR

Answer 19

• make more loans and free up reserves for banks
• increase the money multiplier. increase in money supply

Question 20

Increasing the RRR

Answer 20

-banks must hold more money in the reserve. shrinks money supply

Question 21

discount rate

Answer 21

the interest rate that banks pay to borrow money from the fed

Question 22

reducing discount rate

Answer 22

fights unemployment

Question 23

increase discount rate

Answer 23

fights inflation

Question 24

bonds and interest rates

Answer 24

inversely related because of markets

Question 25

liquidity

Answer 25

ease with which an asset can be accessed and converted into cash

Question 26

M1( high liquidity)

Answer 26

coins, currency, and checkable deposits

Question 27

M2 (medium liquidity)

Answer 27

M1 plus savings deposits, time deposits, and mutual funds below 100,000

Question 28

M3(low liquidity)

Answer 28

M2 plus time deposits over 100,000

Question 29

Money Demand Shifters

Answer 29

• change in price level
• change in real gdp output
• change in transaction costs

Question 30

supply of money

Answer 30

set by the board of governors of the Fed

Question 31

shifters of money supply

Answer 31

• shifting the RRR
• discount rate
• open market operations (buying and selling bonds)

Question 32

money supply and discount rate

Answer 32

-decrease money supply = increase discount rate
- increase money supply = decrease discount rate

Question 33

bonds

Answer 33

• big bucks (increase money supply) = buy bonds
• small bucks (small money supply) = sell bonds

Question 34

real interest rate

Answer 34

percentage increase in purchasing power that a borrower pays (adjusted for i flatiron)
real=nominal -expected inflation
- you want to loan out with an i retest rate higher than expected inflation to get real profit

nominal = real + expected inflation

Question 35

buyers and sellers

Answer 35

buyers: want low prices
sellers: want high prices

agree in the middle

Question 36

borrowers and savers

Answer 36

• Borrowers (CIGXe): consumers, businesses, governments, foreigners (exports)
• savers: banks, fed, individuals, savers