Unit V Terms Flashcards
Three qualities of money
medium of exchange, store value, unit of accounting
Fiat Money
Inconvertible money validated by the government
Gremshem’s Law
Bad money chases out good money; valuable money is hoarded while less valuable money is spent
M-1
cash, coins, demand deposit, checking account (liquid money)
M-2
M-1 + savings accounts
Quantity Theory of Money
MV = PQ
When there is a recession,
lower reserve requirements, lower discount rate, buy bonds
When there is inflation,
raise reserve requirements, raise discount rate, sell bonds
Problems with the Federal Reserve
- not a lender of last resort 2. makes mistakes 3. not transparent 4. liquidity traps - takes too long to make loans
Asset demand
how likely I will hold some money in cash
Transaction Demand
The money needed for me to survive
The opportunity cost of holding onto money is….
the interest rate!!!
Three components of the taylor rule
inflation, unemployment, and federal funds rate; if 2/3 follow what 2/3 suggest
Federal funds rate
the interest rate banks charge other banks for loans
Absolute advantage
when one country can make more of a product than another country
comparative advantage
considering the opportunity cost of production
Free trade
each country makes what it’s good at; the smaller country always benefits from the trad
Current account
balance of trade (goods and services exports less imports), net income from abroad and net current transfers
Captial account
bonds, stocks, real estate
5 factors for change in demand of currency
politically unstable; high interest rate; recession/economic growth, better products/cheaper resources, natural disasters
Money multiplier
1/reserve requirement
discount rate
interest rate banks pay to borrow money from the fed
open market operations
the fed’s purchase and sale of government securities
