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Flashcards in Chapter 6 Deck (22):
1

Price Index Formula

PI=(cost of market basket in focal period)/(Cost of market basket in base period) x 100

2

Inflation

Inflation= (PI year 2 / PI year 1) - 1

3

Adjusting Data for Price Change

EQUIVALENT INCOME new = CPI new / CPI old x INCOME old

4

Nominal Income

number on a paycheck

5

Real Income

expresses nominal income in terms of base period prices

6

Double Coincidence of Wants

two goods to be exchanged having equal value

in barter, the problem of finding someone who wants what you have and has what you want

7

Functions of Money

Medium of Exchange
Store of Value
Unit of Account

8

Commodity Money

Money that has other uses

9

Fiat Money

Money that does not have any other uses

10

Liquidity

The ease with which an asset can be converted into a spendable form.

11

M1

How much money is in the economy

3 PARTS OF M1
-Paper Currency held outside banks
-Checking Account Balances
-Traveler's Checks

12

How big is M1

2.9 Trillion

13

Monetary Policy

the Fed using money supply to attempt to affect the economy

14

Federal Open Market Commitee

Conducts Monetary Policy

7 governors

the NY Fed President

11 other district bank presidents, 4 of whom vote on a rotating basis.

15

3 Tools of Monetary Policy

Open Market Operations

Required Reserve Ratio

Discount Rate

16

Open Market Operations

Buying and Selling of US government bonds

17

Required Reserve Ratio

Percentage of Deposits that a bank cant lend, but must hold as reserve

18

Discount Rate

interest rate paid when a bank borrows from the Fed

19

Federal Funds Rate

Free market rate at which banks lend to other banks

20

Consumer Price Index

Weighted average of prices

21

PCE Price Index

Price Index excluding food and fuel

22

Excess reserves

reserves that banks hold outside of Fed requirements