Chapter 6 Flashcards
(30 cards)
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.
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.
