Unit 5 Test Prep Flashcards
barter system
goods and services are traded directly
ex: a farmer trades pineapples to another farmer for broccoli
money
anything that is generally accepted in payment for goods or services
wealth
total collection of assets that store value
income
a flow of earnings per unit of time
commodity money
based on an item (silver, gold, diamond, shells, etc) that has value to a society
representative money
something (usually paper currency) can be exchanged for something else (normally a precious metal)
fiat money
somethign that serves as money but has no other important uses. the government says it has value, so it does
scarce (limited supply)
money must not be easily reproduced
portable
money must be easily transported
divisible
easy to make change
durable
something that will last a long time
uniform
consistent in size and shape
the board of governors
the FED is overseen by 7 board member board of governors. appointed by the president to 7 year terms
federal reserve district
12 federal reserve districts with one federal reserve bank per district
member banks
all banks (wells fargo, bank of america, etc). reports to the fed
money creation
the process by which money enters circulation (loans)
required reserve ratio
the money banks hold back and can not be loaned out
money multiplier
1/rrr
reducing RRR
- make more loans and free up reserves for banks
- increase the money multiplier. increase in money supply
Increasing the RRR
-banks must hold more money in the reserve. shrinks money supply
discount rate
the interest rate that banks pay to borrow money from the fed
reducing discount rate
fights unemployment
increase discount rate
fights inflation
bonds and interest rates
inversely related because of markets
liquidity
ease with which an asset can be accessed and converted into cash
M1( high liquidity)
coins, currency, and checkable deposits
M2 (medium liquidity)
M1 plus savings deposits, time deposits, and mutual funds below 100,000
M3(low liquidity)
M2 plus time deposits over 100,000
Money Demand Shifters
- change in price level
- change in real gdp output
- change in transaction costs
supply of money
set by the board of governors of the Fed
shifters of money supply
- shifting the RRR
- discount rate
- open market operations (buying and selling bonds)
money supply and discount rate
-decrease money supply = increase discount rate
- increase money supply = decrease discount rate
bonds
- big bucks (increase money supply) = buy bonds
- small bucks (small money supply) = sell bonds
real interest rate
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
buyers and sellers
buyers: want low prices
sellers: want high prices
agree in the middle
borrowers and savers
- Borrowers (CIGXe): consumers, businesses, governments, foreigners (exports)
- savers: banks, fed, individuals, savers
