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Flashcards in Money and the Federal Reserve Deck (50):
1

What are the 3 functions of money?

1) Medium of Exchange 2) Measure of Value 3)Store of value over time

2

What is the BARTER SYSTEM?

People exchange what they have for what they need. As long as society is simple

3

When is the barter system used?

when an economy collapses

4

What is COMMODITY MONEY?

when people in a region use a product as money (tobacco, cotton)

5

When does the commodity system work?

when the product is scarce.

6

What is commodity backed money?

when paper money and coin are backed up by some valuable comodity (gold or silver)

7

What is another name for commodity backed money?

Gold standard

8

What can commodity backed money save nation from?

Inflation

9

What is fiat money?

paper money and coin is backed by nothing

10

Why do we believe in the value of our money?

because our government has been stable for so many years

11

What MUST the government do with fiat money?

balance the money supply

12

What will too much paper money in circulation cause?

inflation

13

What willl too little money cause?

interest rates to rise. Then businesses won't borrow and new jobs wont be created

14

Who has primary responsibility for balancing the money supply?

the FED ,federal reserve

15

what do the board of govorners do?

they are appointed by the president and make decisions for the economy

16

what does the federal open market committee do?

supervises the trading of t-bonds

17

what does the federal advisory committee do?

offers advice, but has little power

18

how many federal reserve banks are there?

12 serves as a bank for commercial banks

19

what is monetary policy?

the decisions the board of governers makes to balance the money supply

20

what are the 4 decisions that the FED can make to balance the money supply?

1. Raise/lower the discount rate 2. raise/lower margin reserve requirement 3. sell/redeem treasury bonds 4. Moral suasion

21

What is the discount rate

the interest rate a commercial bank pays to a federal reserve bank

22

what is a prime rate

the interest rate we pay to a commercial bank

23

what does it mean to raise/lower the discount rate

IF THERE IS TOO MUCH MONEY the money supply has to be contracted: discount rate is raised, banks borrow less, prime rate is high, we borrow less

24

what does it mean to riase/lower the margin reserve requirement

TO CONTRACT THE MONEY SUPPLY: requiring commercial banks to keep a larger than normal percentage of their depositis in their regional FED bank

25

what does it mean to sell/redeem t-bonds?

TO CONTRACT THE MONEY SUPPLY: sell them at an attractive interst rate to take money out of circulation

26

what is moral suation?

when the board of governors asks congress for their help. Like raise taxes to contract money supply

27

What are commercial banks?

corporations trying to make a profit

28

what is economic growth?

increase in the number of goods/services avaliable in 1 years time

29

what does economic growth mean?

its good because it means that our standard of living is improving

30

what is economic growth caused by?

discovery of new resources or advances in technology

31

what is a nominal statistic?

raw data, collected info & no change

32

what is a real statistic?

adjusted statistic

33

what is the GDP?

gross domestic product- dollar value of all the final stuff produced in the US in 1 year

34

What is the GNP?

value of all final product produced by US companies operating all around the world

35

what is a good growth rate for the US per year?

4 percent

36

what is the NI?

national income- total earned income by all businesses in the US in 1 year

37

what is the PI?

personal income- sum of household income in US in 1 year

38

what is the DI?

disposable income- amount of income avaliable after taxes (what we actually get to spend)

39

what does the government do with the national income statistics?

determine if they need to expand/contract the money supply

40

What is the formula for GDP/GNP?

C + I + E + G = GDP or GNP

41

what is the "C" in the equation?

consumer sector: total dollar value of final consumer goods. Durable and non durable

42

what is the "I" in the equation?

investment sector: total dollar value of all final capital products produced for US businesses in 1 year

43

what is the "E" in the equation?

export sector: total dollar value of our net exports. Usually negative since we import more than we export. Called trade deficit

44

what is the "G" in the equation?

government sector: all product that the government purchases

45

what is the CPI?

consumer price index; measures inflation in consumer product every 3 months

46

what is the WPI?

wholesale price index; meausres rent per sq ft and hourly cost of labor

47

What are the 4 rates of inflation?

creeping, walking, running, hyper inflation

48

What are the 2 theories on the cause of inflation?

cost push theory and demand pull theory

49

What is the cost push theory?

production costs increase, "pushing" up retail prices

50

What is demand pull theory?

excessive consumer demand creates shortages of the product increasing its price