Macro Final Flashcards
(33 cards)
What is money according to economists?
Any asset that people are generally willing to accept in exchange for goods and services or for the payment of debts.
Define ‘asset’.
Anything of value owned by a person or a firm.
What is bartering?
Trading goods and services directly for other goods and services.
What is commodity money?
Goods used as money that also have value independent of their use as money.
List the four primary functions of money.
- Medium of Exchange
- Unit of Account
- Store of Value
- Standard of Deferred Payment
What does ‘medium of exchange’ refer to?
Money is acceptable to a wide variety of parties as a form of payment for goods and services.
What is the role of money as a ‘unit of account’?
Money allows a way of measuring value in a standard manner.
How does money serve as a ‘store of value’?
It allows people to defer consumption till a later date by storing value.
What is meant by ‘standard of deferred payment’?
Money facilitates exchanges across time when we anticipate that its value in the future will be predictable.
What are the characteristics a good must have to serve as an acceptable medium of exchange?
- Acceptable to most people
- Standardized quality
- Durable
- Valuable relative to its weight
- Divisible
What is fiat money?
Any money, such as paper currency, authorized by a central bank or governmental body that does not have to be exchanged for commodity money.
What is the advantage of fiat money?
It makes central banks more flexible in creating money.
What is M1 in terms of money supply?
The sum of currency in circulation and checking account and savings account deposits in banks.
Define M2.
The broader definition of money supply that includes M1, plus small-denomination time deposits, and noninstitutional money market fund shares.
What are reserves in banking?
Deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve.
What are Required Reserves?
Reserves that a bank is legally required to hold, based on its checking account deposits.
What is the required reserve ratio?
10%, the minimum fraction of deposits banks are required by law to keep as reserves.
What is the simple deposit multiplier with a 10% required reserve ratio?
10.
What happens to the money supply when banks gain reserves?
They make new loans, and the money supply expands.
What is a bank panic?
When many banks experience bank runs, where many simultaneously withdraw their money.
What is the role of central banks during bank panics?
They act as a lender of last resort.
What is the purpose of the Federal Deposit Insurance Corporation (FDIC)?
Insures deposits in many banks, up to a limit of $250k.
Name one of the six monetary policy tools used by the Fed.
- Open market operations
- Discount policy
- Reserve requirements
- Interest on reserves
- Overnight reverse repurchase agreement facility
- Term deposit facility
What is the discount rate?
The interest rate paid on money banks borrow from the Fed.
