week 3 Flashcards
Hyperinflation
When inflation reaches an extraordinarily high level
Least restrictive defination of money
any good that is intered for use in exchange
Three functions of money
Medium of exchange, unit of account, store of value
Medium of exchange
moeny can be used to buy and sell goods and services
Unit of account
money provides the terms by which prices and debts are recorded
Store of Value
money provides a means of transferring purchasing power from the present to the future
Double Coincidence of Wants
The double coincidence of wants occurs in successful barter or direct exchanges
The preferences of both parties align and demand each othersβ goods. Exchange is able to take place.
Commonly Accepted Medium of Exchange (CAMOE)
Once a medium of exchange is widely accepted and used, it achieves CAMOE status.
Commodity money
money that has value outside of its role as money.
Ex: Gold or Precious Metals
Ex: Cigarettes
Fiat Currency
money that has no value outside of its role as money
Money Supply
the quantity of money available in the economy
Monetary Policy
policy that affects the money supply
open market operation
the purchase and sale of government bonds
Currency (C)
is defined as the amount of paper money and coins in circulation in the economy.
M1
C + demand deposits at commercial banks + travelerβs checks + other checkable deposits
M2
M1 + saving deposits + small-denomination time deposits + balances in retail money market funds
Fractional reserve banking
some non-zero percentage of the deposit is lent out to others (not 100% reserves)
Monetary base (B)
is the total amount of money held by the public as currency (πΆ) and by the banks as reserves (π ) such that π΅=πΆ+π . The monetary base is directly controlled by the Federal Reserve.
Reserve-deposit ration (rr)
is the fraction of deposits (π·) that banks hold in reserve (i.e., ππ=π
/π·). It is determined by business policies of banks and the laws regulating banks.
It follows from the last slide that 0β€ππβ€1.
currency-deposit ratio (cr)
is the amount of currency (πΆ) people hold as a fraction of their holdings of demand deposits (π·; i.e., ππ=πΆ/π·)
The monetary base (B) is proportional to what
money supply (M) and grows by the same amount
A decrease in Reserve-deposit ration (rr) causes a waht
a decrease in ππ INCREASES π and π.As the reserve-deposit ratio (ππ) decreases, the more loans banks make, and the more money banks create from every dollar of reserves.
A decrease in the currency-deposit ration (cr) causes what
a decrease in ππ INCREASES π and π. As the currency-deposit ratio (ππ) decreases, the fewer dollars of the monetary base the public holds as currency, the more base dollars banks hold as reserves and the more money banks can create.
Tightening or contractionary monetary policy
Increases the policy rate federal fund rate and IOR. Increase market interest rate and reduces the money supply