midterm - unit 3: money Flashcards
(31 cards)
modern money backing
-the USD is backed by the full faith and credit of the United States government
-congress says that the federal reserve banks must hold collateral value in notes that the federal reserve bank puts into circulation
Dollars: Real vs Banking
Dollars in the real economy:
<->Banks <->
HH <-> Firms
Dollars in the banking system:
<->Banks<->
Fed <-> Treasury
Monetarism: supply shock
- following a positive and permanent shock to AS, the economy experiences downward pressure
Monetarism: Money supply
-as long as the velocity of money does not increase in a systematic fashion,
1. to avoid deflation the money supply must rise alongside RGDP
2. to induce inflation, money supply must rise faster than RGDP
Exchange vs over the counter
-an exchange is a central platform that allows trading
-over the counter markets are networks of bilateral trading relationships centered around one or multiple dealers
There are two exchange rate archetypes
- Free floating:
-the exchange rate is entirely market determined without any sort if government intervention - Fixed:
-the exchange rate is entirely fixed (with some respect to some other commodity)
International monetary history
-Gold standard
-Gold exchange standard
-Reserve currency
US monetary timeline
- commodity —> commodity backed fiat
- commodity backed fiat
- dirty float/ pure fiat
Appreciation
-if a currency appreciates, locally produced goods become more expensive abroad
-whereas foreign produced goods become cheaper locally
-causes a positive shock to demand, a negative shock to supply, or both
Depreciation
-if a currency depreciates, locally produced goods become cheaper abroad
-whereas foreign produced goods become more expensive locally
-to boost local aggregate demand, a country might be tempted to depreciate, or devalue, its currency
-causes a negative shock to demand, a positive shock to supply, or both
Trade based models
-exchange rates fluctuate so as to equilibriate asset goods prices
-the law of one price
-purchasing power parity
asset based model
-exchange rates fluctuate so as to equilibriate asset returns
-uncovered interest rate parity
-covered interest rate parity
Bank vs NBFI ex
banks:
-a financial institution with Fed account and deposit insurance
-commercial banks
-savings and loan institutions
-credit unions
nbfis:
- a financial institution without a Fed account and deposit insurance
-collective investment vehicles
-pension funds
-insurance companies
CBDC
-a central bank digital currency is any electric currency issued by a country’s central bank
-wholesale CBDC: held in and used by banks to settle interbank debts
-retail CBDC: held and used by households and firms
benefits of retail CBDC
within a country:
-increase access to the underbanked
-lower interchange fees for merchants
-higher interest rates on demand deposit accounts
cross border:
-improve cost border payments
Intrinsic value of bitcoin
real:
-bitcoin does not have any real intrinsic value because it never pays any sort of real dividends
nominal:
-bitcoin does not have any nominal intrinsic value because it never pays any sort of nominal dividends
Considering the two definitions listed below, discuss whether Floyd Mayweather’s boxing skills (at his peak) constituted an asset and whether they constituted money
Asset: an asset is any possession that has value
Money: An asset is said to be money if it jointly serves as a store of value, medium of exchange, unit of account, and standard of deferred payment in the same economy
-considering the definitions his skills at his peak were an asset
-they were valuable in the world of boxing (record and earnings)
-even though his skills were valuable and generated money, they don’t fit all the criteria as listed in the definitions
-his skills are not universally recognized as a medium or exchange or deferred payment
What is the nominal value of a dollar bill? In your answer, be sure to state explicitly if and why it is zero or greater than zero.
-the nominal market value of a dollar bill is greater than zero because it has a face value of one dollar
- this means that in an economy it can be exchanged for goods and services that are worth one dollar.
-It’s value can fluctuate based on inflation and other factors that impact it’s purchasing power over time
The US dollar is involved in 9 out of 10 foreign exchange transactions. Why would a trader buy US dollars first if they really wanted to buy another currency. For example, why would a trader holding Japanese Yen trade them for US dollars first and then use those US dollars to buy Swiss francs rather than just use their Yen to buy Swiss francs directly?
-The US dollar is mainly used in exchange transactions for several reasons
-first the US dollar is considered to be a global reserve currency, which means that it is widely accepted and many banks have it around the world
-when a trader wants to buy another currency like the Swiss franc, they would go through the US for a couple of reasons
1.) the US dollar is very liquid which means that there are alot of buyers and sellers of USD, so trades in it are faster and easier
2.) the depth of the US dollar market ensures that traders can usually get the amount of USD they need without being largely impacted by exchange rates
3.) the transaction costs may be lower
Describe how the gold standard limits a central banks ability to create fiat money
-the gold standard is a system where a country’s currency is directly pegged to gold at a fixed price
-under the gold standard, central banks can only issue as much money as they have in gold reserves
-this limits their ability to create fiat money because they have to balance the amount of currency that is in circulation and the amount of gold in reserve
-if they print more money than they have in gold it can lead to inflation or run on the gold reserves which would destabilize the economy
When looking at the price of cookies at the grocery store, which function of money is being fulfilled?
a. store of value
b. medium of exchange
c. unit of account
d. standard of deferred payment
c. unit of account
When using dollars to purchase cookies at the grocery store, which function of money is being fulfilled?
a. store of value
b. medium of exchange
c. unit of account
d. standard of deferred payment
b. medium of exchange
Which of the following types of dollars is both physical and accessible to households for purposes of purchasing goods and services?
a. currency in circulation
b. vault cash
c. demand deposits
d. reserves
a. currency in circulation
The nominal market value of a financial asset such as a stock or bond
a. is given by the price at which it can be sold in financial markets
b. given by the cash flow they generate for their owners
c. is zero unless the owner is able to exchange it for a good or service
d. is zero unless the own derives happiness from owning the financial asset
a. is given by the price at which it can be sold in financial markets