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Economics > Money and Banking > Flashcards

Money and Banking Flashcards

1
Q

what is the price level

A

the overall rate of prices in an economy, measured by GDP deflator or consumer price index

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2
Q

what is consumer price index

A

measuring of the prices that matter to consumers eg groceries, education, household goods

doesnt include tech goods, pharmaceutical goods produced in a country unlikee GDP

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3
Q

what is inflation

A

the steady rise of prices over time

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4
Q

what does nominal mean

A

the total value of transactions

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5
Q

what does real mean

A

total value of transactions, controlling changes in price

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6
Q

how to calculate GDP deflator

A

nominal GDP / real GDP * 100

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7
Q

in the base year what will the GDP deflator always be

A

100

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8
Q

what is wealth

A

any value that is stored up

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9
Q

example of stock wealth

A

loans, site of land, share in a firm

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10
Q

example of flow wealth

A

interest payments, rent, income

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11
Q

what are the 2 types of financial systems

A

financial market

financial intermediaries

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12
Q

what do financial systems do

A

match one persons savings with another persons investment

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13
Q

example of financial market

A

stock and bond market

direct interaction between savers and borrowers

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14
Q

example of financial intermediaries

A

banks

indirect interaction between savers and borrowers

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15
Q

4 main forms of financial wealth

A

property and real estate
equities
bonds
cash

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16
Q

what is an equity

A

partial ownership in a public firm

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17
Q

what is the most liquid form of wealth

A

cash

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18
Q

some unusual forms of wealth that are difficult to measyre

A

art
cars
natural materials

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19
Q

define money

A

the assets in an economy that people regularly use to buy goods and services

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20
Q

3 functions of money

A

medium of exchange
unit of account
store of value

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21
Q

what does it mean to be a medium of exchange

A

turn your stock of wealth into everyday good and services

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22
Q

what does it mean to be a unit of account

A

measureable

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23
Q

what does it mean to be a store of value

A

purchasing power from present to future exists, ie £1 of money is worth £1 in futre

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24
Q

why might bitCoin not be considered money

A

it isn’t a medium of exchange

too volatile to be a store of value

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25
Q

what is fractional reserve banking

A

banks hold a fraction of the deposits and lend out the rest

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26
Q

what are liabilities in banks

A

depsoits, what the bank owes people

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27
Q

what are assets in banks

A

loans, what the people owe the bank

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28
Q

what is a reserve rati

A

the fraction of deposits that the bank holds as reserves

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29
Q

formula for money multiplier

A

1/r

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30
Q

who controls the reserve ratio

A

the central bank

control of supply of money

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31
Q

what is a credit risk

A

the probability that the borrower will fail to pay some of the interest or principle

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32
Q

what is sovereign debt

A

when governments borrow money to finance public spendinf

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33
Q

what does it mean when a form of wealth has intrinsic value

A

the item would have value even if not used as money eg gold, jewellery

34
Q

what is fiat money

A

money that doesn;t have intrinsic value and is only used as money because the government says sp

35
Q

what is money stock

A

the quantity of money circulating in the economy

36
Q

what are central banks

A

institutions designed to regulate the quantity of money in the economy

37
Q

what is monetary policy

A

set of actions taken by the central bank to affect the money supply

38
Q

if the interest rate is higher, do people want to save or spend their money

A

save

increase opportunity cost in holding money

39
Q

Demand of money depends on what

A

interest rates

40
Q

what is the relationship between interest rates and demand for money

A

negative relationship

as interest rates go up, demand for money falls as people don’t want to hold as much money

41
Q

what is the central bank in America called

A

Federal reserve

42
Q

what is the central bank in europe called

A

European central bank

43
Q

what are the three main tools that central banks use to affect money supply

A
  1. changing reserve ratio
  2. changing the refinancing rate
  3. open market operations
44
Q

when there is a higher reserve ratio, is more or less money created

A

less

45
Q

what is the refinancing rate

A

the rate at which the central bank lends to the private banks

46
Q

does a higher refinancing rate increase or decrease money supply

A

decrease as it is harder to borrow money

47
Q

how can the central bank take money out of circulation

A

selling government bonds in exchange for cash

48
Q

how can the central bank put more money into circulation

A

buying government bonds in exchange for cash

49
Q

two main roles of central bank

A
  1. price stability (keeping inflation low)

2. smoothing cycles

50
Q

what percentage do central banks like to keep inflation at

A

2%

51
Q

can interest rate affect GDP

A

yes

52
Q

how does interest rate affect GDP

A

GDP = C(r) + I(r) + G(r) + NX(r)

r reflects cost of borrowing, borrowing is cheaper when r is low and more expensive when r is high

53
Q

when interest rates fall does aggregate demand increse or decrease

A

increase

54
Q

what is the dual mandate of the FED

A

price stability & full employment

55
Q

why might a dual mandate be diffciult

A

increasing output and lowering unemployment means there must be a rise in prices

but a rise in prices goes against the price stability mandadte

the reverse is also truewha

56
Q

what is helicopter money

A

unlimited money supply continues to be dropped into the economy

57
Q

why are interest rates cut during a crisis

A

encourages borrowing and investing
will shift AD curve out
in aim to bring back to long run gowth

58
Q

what is a zero lower bound

A

when the CB are limited in reducing the interest rate because they cannot have a negative interest rate

59
Q

what is the money multiplier

A

how much money the banking system can create with each euro of reserves

60
Q

where is ECB HQ

A

Frankfurt, Germany

61
Q

if the CB wanted to increase the money supply, how would they change reserve requirements

A

decrease reserve requirement

62
Q

if the CB wanted to decrease the money supply, how would they change reserve requirements

A

increase reserve requirement

63
Q

what is the discount rate./ policy rate

A

the rate at which the CB lends to the private banks

64
Q

if the CB wanted to decrease the money supply, how would they change discount rates

A

increase discount rate

65
Q

if the CB wanted to increase the money supply, how would they change discount rates

A

decrease discount rates making it eaier to borrow

66
Q

in an expansionary period, why is there a low interest rate

A

cheaper to borrow ==
more investment
more consumption

67
Q

does monetary policy work in the long run

A

no, monetary policy only deals with the short run

68
Q

what happens to AD when bubbles pop

A

shifts to the left

69
Q

what is a deficit

A

Spending more money than generated in revenue

70
Q

what is debt

A

accumulation of defecits

71
Q

what can help slow down debt

A

surplus

72
Q

should debt be looked at on its own or as a percentage of GDP

A

as a percentage of GDP, making it easier to compare countries

73
Q

what does the ECB say the debt percentage of GDP is too high

A

60%

74
Q

how can debt be decreased using fiscal policy

A 
increase taxes
use government revenue to reduce deficit
(eg USCI)
cut government spending
bailout options
75
Q

when is debt sustainable

A

if the growth rate of the economy is greater than the interest rate

76
Q

what is the emergency European Stability Mechanism

A

the EU restructures loans at a much lower interest rate

77
Q

Describe a change in the tax system that might increase private saving.

A

To encourage people to invest in a pension early by offering a certain growth percentage on pension savings through the government would mean the government would have to spend less on state pensions

78
Q

is supply of money elastic

A

no inelastic

79
Q

how many member states in ECB

A

27

80
Q

Why is it important for central banks to maintain price stability

A

economy works best when prices are stable

if prices are constantly falling and rising, peeople will wait for prices to fall before they buy goods and services

Economics (25 decks)

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