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Flashcards in Chapter 6 Deck (30):

Money is

anything that is generally acceptable in making exchanges.


Barter is

trading without using a widely acceptable means of exchange (money)


To barter

there must be a double coincidence of wants. If I have pizza and I want to trade for gas, I need to find someone with gas who wants to trade for pizza.


Which is more successful-- money or barter?

Money is more successful in trading because a double coincidence of wants is an inconvenience.


The functions of money are

1) A medium acceptable form of exchange-- acceptable and convenient means of exchange 2) Unit account-- each unit of the means of exchange is of the same value 3) Store of value-- it holds value over time.


Commodity money is

money that has uses outside of the three functions of money.


Money that has no use outside the three functions is

fiat money.


The wellspring of all U.S. dollars is the

Fed Reserve and National Bank


Liquidity is

the ease of which money can be transferred into a usable form.


The most referenced unit of measure is



M1 is the sum of

paper currency held outside of banks, checking account balances, and travelers' checks.


The balance of the M1 account is nearly

2.8 Billion, and has increased since the 1980s


The Federal Reserve was created

to stabilize the banking system to be a lender for last resort banks.


While the Federal Reserve was created to stabilize the banking system,

Friedman, Hayek, and other economists credit the Federal Reserve as the cause of the Great Depression.


How does the Fed get its budget?

It doesn't get its budget from Congress-- it creates it itself.


Monetary policy

is how the Fed uses the money supply in attempt to affect the economy.


The Federal Open Market Committee (FOMC)

conducts monetary policy and is composed of seven members of the Board of Governors, the President of the New York Federal Reserve Bank, and the Presidents of the other eleven district banks


Voting against the chairman is often frowned upon,

so most of his recommendations are adopted.


The three tools of monetary policy are

open market operations-- buying and selling bonds from previous owners who bought bonds from the U.S. government, the required reserve ratio-- how much banks must keep in their reserves, limiting how much money the banks can lend out, and the discount rate-- when a bank borrows money from the fed, it pays interest at a discounted rate.


When the Fed buys bonds from owners,

bonds flow into the economy and money flows into the economy, increasing the money supply, and vice-versa.


A bank's reserves consist of

it's vault cash plus the money in their account at the Fed.


Excess reserves are

reserve money banks can use to lend out, outside of the required reserve ratio.


With a lower required ratio,

banks can lend more money, and vice-versa.


In creating money, the Fed's target is

the Federal Funds Rate, which is a free market rate at which banks lend to other banks.


The fed prefers to use

Open Market operations to change the money supply.


Money simplifies exchange in an economy by

giving a common unit of account.


The Consumer Price Index (CPI)

measures prices of 200 goods that a typical consumer buys.


The PCE price measure

excludes gas money and food from its calculation.


The Price Index is found by

((cost of market basket in a period of interest)/(cost of market basket in a base period)) X 100


To find inflation

subtract the base year Price Index from the Price Index of interest, and then divide it by the price index from the base year.