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Macro > Exam 3 > Flashcards

Exam 3 Flashcards

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1
Q

3 functions of money

A
  1. Medium of Exchange
  2. Store of Value
  3. Unit of Account
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2
Q

3 Types of Money

A
  1. Fiat Money
  2. Commodity Money
  3. Commodity Backed Money
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3
Q

Fiat Money

A

Money without intrinsic value (not backed by value) that is used as money due to government decree. Most money is fiat money

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4
Q

Commodity Money

A

Money that takes the form of a commodity with intrinsic value ( gold, silver, precious metals, grain, salt,etc)

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5
Q

Money Stock

A

quantity of money circulating in the economy

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6
Q

Money Supply

A

sum of currency ( coin and paper money) and deposits at banks

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7
Q

Currency

A

Money in its physical form ( coin and paper money)

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8
Q

Checking Deposits

A

accounts at a financial institution that checks can be written ( checkable deposits)

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9
Q

M1 (measure of money)

A

currency plus checking deposits and travelers checks

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10
Q

M2 ( measure of money)

A

M1 + savings deposits, time deposits, and accounts with limited check writing ability

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11
Q

Savings Deposit

A

deposit that pays interest from an account that allow normal withdrawal

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12
Q

Time Deposit

A

deposit that pays interest over a certain period of time, withdrawal causes loss of interest if before time period ends

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13
Q

FED (Federal Reserve System)

A

central bank of the united states, oversees creation of money in US

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14
Q

bank

A

firm that channels funds from “savers” to “investors” by accepting deposits and making loans

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15
Q

FED board of governors

A 
"Federal Reserve Board"
7 members
14 year non-renewable terms
appointed by president
confirmed by senate
1 governor appointed Chairman of Board by president
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16
Q

FED district banks

A

12 district banks

President of each bank sits on FOMC

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17
Q

Federal Open Market Committee (FOMC)

A

committee makes decisions regarding influencing money supply in the US/ implementing monetary policy
meets 8 times per year
5 presidents vote at time( president of NY FED bank + group of 4 rotating presidents)
7 Governors + 12 District Bank Presidents

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18
Q

Monetary Policy

A
  1. Reserves Ratio
  2. Open Market Operations
  3. Discount Rate
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19
Q

Reserves Ratio

A

“fractional-reserve banking”, reserves required, interest on reserves and the money multiplier

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20
Q

Open Market Operations

A

Selling and Purchasing of Bonds

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21
Q

Discount Rate

A

Rate that is charged to banks by the FED for short term loans

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22
Q

Short Term Interest Rate

A

interest rate on financial assets “loans” that mature in six months or less

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23
Q

Long Term Interest Rate

A

interest rate on financial assets “loans” that mature after longer than 1 year

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24
Q

Money Demand Curve

A

shows the relationship between the quantity of money demanded and the interest rate

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25
shifts in the money supply curve are due to:
1. Aggregate Price Level 2. Real GDP 3. Technology 4. Institutions
26
Liquidity Preference Model
says interest rate is determined by the supply and demand for money
27
(Setting Federal Funds Rate) effect on interest rate An Open Market Purchase.......
drives the interest rate down
28
(Setting Federal Funds Rate) effect on interest rate An Open Market Sale...
drives the interest rate up
29
Expansionary Monetary Policy
policy that increases aggregate demand ( shifts AD to right)
30
Contractionary Monetary Policy
policy that decreases aggregate demand (shifts AD to left)
31
Fiscal Policy
Use of government spending and taxation to influence size of economic fluctuations
32
Federal Budget
Summary of the federal governments proposal for spending, taxes, and the deficit
33
Fiscal Year
runs October to October
34
Balanced Budget
tax revenues = government spending
35
Budget Surplus
tax revenues > government spending
36
Budget Deficit
tax revenues
37
Government Tax Revenue Sources
1. Personal Income 2. Corporate Income 3. Payroll 4. Others taxes
38
Government Expenditures
1. Social Security 2. Medicaid 3. Defense 4. Interest on debt 5. other government programs
39
Federal Debt
total amount of outstanding loans owned by the government
40
Debt to GDP ratio
total amount of outstanding loans owned by the federal government divided by nominal GDP
41
Objective of fiscal policy...
Get economy back to potential GDP
42
When the economy is below potential GDP fiscal policy requires spending to ...
increase spending
43
When the economy is above potential GDP fiscal policy requires spending to..
decrease spending
44
Recession
2 consecutive quarters which the economy declines below its long term trend
45
Boom
2 consecutive quarters which the economy rises above its long term trend
46
Potential GDP
economies long term growth trend for real GDP determined by the available supply of capital, labor, and technology
47
High Potential GDP
unemployment drops below the natural rate
48
Low Potential GDP
unemployment drops below the natural rate
49
Real Business Cycle Theory
Theory that potential GDP is the source of economic fluctuations (real GDP)....usually due to technology
50
Criticism to Real Business Cycle Theory
GDP tends to grow smoothly over time (slow)
51
Reasons why Potential GDP changes slowly
1. populations do not increase of decrease very quickly 2. capital grows slowly over time 3. impact of technological change spreads throughout economy only gradually 4. no sudden decrease in technological know how
52
AD-IA model
used to explain fluctuations in real GDP and inflation AD : aggregate demand curve IA: Inflation adjustment line (SR,MR,LR)
53
Aggregate Demand Curve
line showing negative relationship between inflation and the aggregate quantity of goods and services demanded at that inflation rate
54
causes of AD Shifts to (Right):
1. Increase in Government Spending 2. Decrease in Taxes 3. Increase in foreign demand 4. Increase in consumption 5. monetary policy shift to higher target inflation rate
55
causes of AD shifts to (left):
1. Decrease in government spending 2. Increase in Taxes 3. Decrease in foreign demand 4. Decrease in Consumption 5. Monetary Policy shift to lower target inflation rate
56
Money Multiplier
1/RRR
57
Required Reserves Ratio
% of banks deposits that the bank must hold at the FED Usually 10%
58
Reserve
Lump sum deposits that commercial banks hold at the FED
59
Bank Run
When everybody at a certain bank demands their deposits at once, and the banks do not have the ability to cash all the deposits
60
Hyperinflation
period of very high inflation caused by abnormally high growth rates for the money supply
61
Real Interest Rate
nominal interest rate + inflation rate
62
Counter Cyclical Policy
a policy designed to offset the fluctuations in the business cycle
63
Discretionary Fiscal Policy
changes in taxes or spending policy requiring legislative action by the president or congress ex: 1968 temporary income tax surcharge, Bush home owner tax rebate
64
Automatic Stabilizer
automatic tax spending that occurs over the course of the business cycle and tends to stabilize fluctuations in real GDP ex: tax on income
65
Asset
something of value owned by a firm or a person
66
Liability
something of value that a person or firm owes to someone else
67
Bond
promise of a firm or the government to pay back a certain amount of money after a given period of time
68
Balance Sheet
listing of all assets owned by the banks as well as all liabilities owned by the banks
69
Loan
funds made available by banks to individuals or firms for a period of time, banks earn interest on these loans
70
Quantity Theory of Money
states that the quantity of money available determines the price level growth rate in the quantity of money available determines the inflation rate
71
Quantity Equation of Money
equation relating the price level and real GDP to the quantity of money and the velocity of money MV=PY
72
Velocity (money)
measure of how frequently money is turned over in the economy, number of times each dollar is used on average to make purchases
73
Money Growth + Velocity Growth =
Price Level Growth+Real GDP Growth
74
Inflation=
(money growth+velocity growth)- Real GDP growth

Macro (3 decks)

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