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Flashcards in ECON CH 10 Deck (55):
1

barter

the exchange of one good for another

2

double coincidence of wants

the unlikely occurrence that two people each have a good the other wants

3

money

a medium of exchange, a means of payment: what sellers generally accept and buyers generally use to pay for goods and services

4

three major functions of money

1. medium of exchange
2. store of value
3. unit of account

5

medium of exchange

an item buyers give to sellers when they buy G&S

6

unit of account

a standard unit that provides a consistent way of quoting prices and record debts

7

store of value (saving)

an item people can use to transfer purchasing power from the present to the future (to save)

8

commodity monies

items used as money that also have intrinsic value in some other uses (gold, diamonds, cigs)

9

fiât or token money

items designated as money that are intrinsically worthless (the US dollar bill)

10

money supply

the quantity of money available in the economy to cover all the transactions

11

M1

includes currency (cash) in circulation, demand deposits, travelers checks, and other checkable deposits

12

M2

everything in M1 plus savings deposits, small time deposits, money market mutual funds, and a few other minor categories

13

MS

=currency+deposits

14

no change

M1 goes down, what happens to M2

15

M1

also known as transactions money

16

M2

also known as Broad money

17

M1

what is more liquid? M1 or M2?

18

M2

what is more stable? M1 or M2?

19

financial intermediaries

are banks and other financial institutions that act as links between those who have money to lend and those who want to borrow money (commercial banks, life insurance, pension funds, and saving and loan associations)

20

1. overseas the banking system
2. makes the monetary policy

the FEDs 2 major tasks

21

monetary policy

actions undertaken by the FED to control (change) the supply of money and the cost of money (interest rate) to help stabilize the economy

22

required reserves

the FED requires that banks should hold (not loan out) a certain fraction (of their deposits)

23

excess reserves=

reserves-required reserves

24

required reserves=

%required reserve ration X deposits

25

loan up

banks make this to the point where its excess reserves are zero

26

excess reserves

used by banks to make loans

27

reserve requirement ration (RRR)

the fraction (percentage) of deposits that banks hold as reserves with the FED

28

RRR example

RRR=10% means that if a bank receive a deposit of $100 then $10 will be hold as reserve and $90, the excess reserve, is loaned out to investors

29

increase in MS

an increase in bank reserves leads to a greater that one-for-one increase in what

30

money multiplier

the relationship between the final change in MS and the change in reserves that caused this change

31

money multiplier

the multiple by which MS can increase for every dollar increase in reserves

32

1/RRR

money multiplier formula

33

FED

the central bank of the USA

34

lender last resort

the FED provides funds to troubled banks that cannot find any other sources of funds

35

open market operations

are the purchases and sales by the Fed of gov securities (bills and bonds) in the open market

36

MS goes down

when Fed sells bonds, what happens to MS

37

MS goes up

when Fed buys bonds, what happens to MS

38

1. changing the RRR
2. changing the discount rate
3. engaging in the open market operations

three tools available for the Fed to change the MS

39

RRR

establishes a link between banks` reserves and the deposits the commercial banks are allowed to create in the banking system

40

decrease RRR

if the Fed wants to increase MS, they increase or decrease RRR (which allows banks to create more deposits by loaning out more money)

41

higher money multiplier

a lower RRR means

42

discount rate

interest rate that banks pay to the Fed when they borrow money from Fed

43

increases the MS

when a bank borrows from the Fed, it increases the reserves in the banking system which does what to the MS

44

increases the MS

the lower the discount rate, the lower the cost of borrowing from the Fed, thus banks will borrow more and lend out more, doing what to the MS

45

banks borrow more

if the discount rate is down then banks borrow more or less?

46

money eliminates the "double coincidence of wants" problem

the development of money as a medium of exchange has facilitated the expansion of economic activity because

47

decrease M1 and not change M2

dude transfers $2500 from his checking account to his savings. this transaction will do what to M1 and M2

48

multiply $750 by 30%=$225

$750 in deposits and RRR= 30%

49

loaned up

when a bank has no excess reserves, and thus can make no more loans, it is what

50

-discount rate
-open market operations
-RRR

three instruments used in the Fed to change the MS

51

will increase the MS

a decrease in the RRR will do what to the MS

52

buying gov securities in the open market

what action by the Fed is designed to increase the MS

53

decrease, decrease

an open market sale of securities by the Fed results in ------- in reserves and ------in the supply of money (increase or decrease)

54

bonds go up

interest rates go up, what happens to bonds

55

money goes up

interest rates go down, what happens to money