Unit V Terms

Question 1

Three qualities of money

Answer 1

medium of exchange, store value, unit of accounting

Question 2

Fiat Money

Answer 2

Inconvertible money validated by the government

Question 3

Gremshem’s Law

Answer 3

Bad money chases out good money; valuable money is hoarded while less valuable money is spent

Question 4

M-1

Answer 4

cash, coins, demand deposit, checking account (liquid money)

Question 5

M-2

Answer 5

M-1 + savings accounts

Question 6

Quantity Theory of Money

Answer 6

MV = PQ

Question 7

When there is a recession,

Answer 7

lower reserve requirements, lower discount rate, buy bonds

Question 8

When there is inflation,

Answer 8

raise reserve requirements, raise discount rate, sell bonds

Question 9

Problems with the Federal Reserve

Answer 9

1. not a lender of last resort 2. makes mistakes 3. not transparent 4. liquidity traps - takes too long to make loans

Question 10

Asset demand

Answer 10

how likely I will hold some money in cash

Question 11

Transaction Demand

Answer 11

The money needed for me to survive

Question 12

The opportunity cost of holding onto money is….

Answer 12

the interest rate!!!

Question 13

Three components of the taylor rule

Answer 13

inflation, unemployment, and federal funds rate; if 2/3 follow what 2/3 suggest

Question 14

Federal funds rate

Answer 14

the interest rate banks charge other banks for loans

Question 15

Absolute advantage

Answer 15

when one country can make more of a product than another country

Question 16

comparative advantage

Answer 16

considering the opportunity cost of production

Question 17

Free trade

Answer 17

each country makes what it’s good at; the smaller country always benefits from the trad

Question 18

Current account

Answer 18

balance of trade (goods and services exports less imports), net income from abroad and net current transfers

Question 19

Captial account

Answer 19

bonds, stocks, real estate

Question 20

5 factors for change in demand of currency

Answer 20

politically unstable; high interest rate; recession/economic growth, better products/cheaper resources, natural disasters

Question 21

Money multiplier

Answer 21

1/reserve requirement

Question 22

discount rate

Answer 22

interest rate banks pay to borrow money from the fed

Question 23

open market operations

Answer 23

the fed’s purchase and sale of government securities