Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

macro UGH kms > week 4 > Flashcards

week 4 Flashcards

Savings, investment, and Financial Markets; the monetary system

1
Q

What is money?

A
  • A set of assets in an economy that people regularly use to buy goods and services from other people
  • Liquid
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

what are the three functions of money which distinguish it from other assets?

A

1. Medium of exchange

Item that buyers give to sellers when they want to purchase goods and services

2. Unit of account

Yardstick people use to post prices and record debts

… A Measure of economic value

3. Store of value

Item that people can use to transfer purchasing power from the present to the future

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

what is a unit of account?

A

Something which, if I give it to you, you know its worth (or can immediately find out)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Money is the _____ ________ of assets

A

most liquid

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

what is liquidity?

A

the ease with which an asset can be converted into the economy’s medium of exchange.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

why is money the most liquid of all assets?

A

it IS the medium of exchange thus the most liquid

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Generally, the _____ liquid an asset, the _____ its return.

A

Generally, the more liquid an asset, the lower its return.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

what is money’s return compared to other assets?

A

Not surprisingly, money has the lowest return of any asset (zero or close to zero).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What are the 2 TYPES of money?

A
  1. fiat money
  2. commodity money
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

what is fiat money?

A

Money without intrinsic value that is used as money because of government decree

SATISFIES THE THREE ROLES OF MONEY + HAS NO INTRINSIC VALUE

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

what does intrinsic value mean?

A

Intrinsic value: would have value even if it were not used as money

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

what is critical to remember with fiat money?

A

peoples’ trust is critical!!!!!

..If people lose faith, fiat money will lose its value (e.g., Russian Ruble in 90ies).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

if people have faith in each other (fiat money) then..?

A

No government is neede! (BITCOIN… STONES ON YAP)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

what is COMMODITY money?

A

Money that takes the form of a commodity with intrinsic value

Satisfies the three roles and has intrinsic value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

The money stock is calculated how?

A

By adding all the fiat money up in a country

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Formula for money stock M1

A

M1 = CURRENCY + DEMAND DEPOSITS + CHECKABLE DEPOSITS

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

M2 measure of the money stock is calculated by…?

A

M2 = M1 + short-term savings deposits + money market mutual funds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Who regulates fiat money?

A

Central Banks

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

WHAT is a Central bank?

A

It is a legal entity with authority to:

  • Oversee the banking system
  • Regulate the quantity of money in the economy
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

When was the bank of england founded? What does it do?

A

1964

  1. Monetary policy committee sets interest raves to achieve 2% CPI inflation rate
    • New powers for financial regulation, with the abolition of FSA in the aftermath of the global financial crisis

(The Financial Services Authority (FSA) was abolished because it was criticized for not effectively preventing the financial crisis in 2008. After the crisis, it was decided that a new approach to financial regulation was needed)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

When was the US FED reserve created? What is its policy goal?

A

1913 - created after a series of bank failures in the decade prior

POLICY GOAL: ensure the health of the nation’s banking system

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

When was the ECB created? What’s it’s policy goal?

A

1988

POLICY GOAL: achieving price stability

Inflation rates below but close 2% over medium run

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What is the importance of monetary policy?

A

Prices rise when “too much” money is printed…

@ the same time, interest rates/money supply affect activity and unemployment

so there is a “trade-off”

24
Q

Increased money supply leads to:

A
  • Inflation (bad if inflation is already at or above target but could be good if inflation is below target)
  • Increased production and lower unemployment, at least in the short run (good in a recession!).
25
explain Quantitative Easing
when **Inflation is low and not possible to lower IR more.** Used by banks to help stimulate the economy when standard monetary policy is **no longer effective.** 1. Banks digitally create money 2. Buy government bonds from commercial banks w/ money. 3. Commercial banks use money to loan to firms ↑investment 4. Banks can lend to consumers. ↑consumption However, It could lead to demand-pull inflation
26
Example of real-life use of QE?
Between March 2009 and January 2010, the MPC authorised the purchase of £200 billion worth of assets, mostly gilts This has since been repeatedly renewed.
27
What does QE do?
- Lowers interest rates, - boosts activity… - and increases inflation all else equal (e.g., could prevent deflation in an otherwise deflationary environment).
28
Who also influences the money supply?
BANKS
29
What are reserves?
Deposits that banks have received but have not loaned out
30
what is 100% reserve banking?
All deposits are held as reserves and Banks DO NOT influence the supply of money
31
Money supply in banks is calculated from...?
Money supply = demand deposits + currency
32
define **Fractional-Reserve Banking**
Banks hold only a fraction of their deposits as reserves. Use the remainder to make loans and earn
33
what is **Reserve Ratio**
Fraction of deposits that banks hold as reserves (incase depositors wish to withdraw their cash) reserve requirement/deposits
34
define **Reserve Requirement**
Minimum amount of reserves that banks must hold; set in some countries (Fed, ecb) BUT not imposed by law in UK.
35
what is **Excess Reserve**?
when banks hold reserves above any required legal minimum e.g., First National Bank : Reserve ratio 10%
36
banks only hold..... in reserve?
a fraction of deposits in reserve
37
What is the process of **money creation** through banks? (Money mutliplier)
The process of money creation continues… - *Suppose* the borrower from First National Bank uses the $90 to buy some goods, the proceeds of which are then deposited in Second National Bank → Second National Bank then holds 10% in reserves ($9) and lends out a further **$81** and so on… and on… and on… Original deposit = $100.00 1. First National lending = $ 90.00 [= .9 × $100.00] 2. Second National lending = $ 81.00 [= .9 × $90.00] 3. Third National lending = $ 72.90 [= .9 × $81.00] Total money supply (sum of the above) = $1,000.00
37
how does a bank's loan increase money supply?
- First National bank’s $90 loan increases the money supply (puts money in the borrowers’ pockets). - So FNB has increased the money supply from $100 to $190 Note that this **does not** create wealth. Bank loans are debt for the borrowers who are therefore NOT any richer.
38
Define the money multiplier
Amount of money the banking system generates from each dollar of reserves. It is the RECIPROCAL OF THE RESERVE RATIO
39
Money multiplier M.M relation to reserve ratio?
Reciprocal 1/R So, M.M=1/0.1 = 10 in our example (“$100 becomes $1.000”)
40
The **higher** the **reserve ratio**....?
The **smaller** the money multiplier - Money multiplier = 1 when R=1
41
How does CB use open-market operations to increase money supply?
**To increase the money supply** The Central Bank buys government bonds from the public (thus putting additional currency in the hands of the public).
41
WAT ARE The Central Bank’s Tools of Monetary Control? [3]
1. Open market operations 2. The refinancing rate 3. Reserve requirements
42
WHAt are Open-Market Operations?
Outright purchase and sale of government bonds by the Central Bank
43
What is the refinancing rate?
The interest rate at which the Central Bank will lend to commercial banks on a short-term basis -- Called the refinancing rate in Europe; repo rate in the UK; discount rate in the US
43
How does CB use open-market operations to reduce money supply?
The Central Bank sells government bonds to the public (and the currency it receives is now out of the hands of the public). NOTE: Unconventional OMOs=buying other types of assets such as e.g. private bonds
44
How does the refinancing rate work?
- Banks lend money to each other, and borrow from the central bank in the so-called “money market”. - The central bank can – in normal times - control the money market interest rate through the refinancing rate (as well as through OMOs)
45
What are reserve requirements?
Regulations on minimum amount of reserves that banks must hold against deposits
46
An increase in reserve requirement will...?
reduce the money supply (multiplier ↓)
47
A decrease in reserve requirement will...?
increase the money supply (multiplier ↑)
48
BoE, Fed, ECB prefer not to use reserve requirements since...?
It greatly upsets banks’ business models. However, it does happen (e.g. Basel III increased reverse requirement; China’s CB uses frequently).
49
What are the problems with the Central Bank's monetary tools?
The Central Banks’s control of the money supply is not precise… So money multiplier can **vary** due to **fractional reserve banking**
49
OMOs, refinancing rate, reserve requirements are the _____ ?
“monetary policy tools”.
50
Why is CB's control of money supply not PRECISE?
a) Does **not control** the amount of money that households choose to hold as deposits in banks b) Does **not control** the amount that bankers choose to lend rather than keep as reserves
50
Money supply and interest rates controlled by ...
central banks… albeit imperfectly.
51
OMOs may be __________ or __________
“conventional” (government bonds only) or “unconventional”
52
How to use OMOs to increase or decrease the money supply?
- **To increase the money supply** The Central Bank **buys** government bonds from the public (thus putting additional currency in the hands of the public). - **To reduce the money supply** The Central Bank **sells** government bonds to the public (and the currency it receives is now out of the hands of the public).

macro UGH kms (10 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions