What are the 3 functions of money?
1) Medium of Exchange 2) Measure of Value 3)Store of value over time
What is the BARTER SYSTEM?
People exchange what they have for what they need. As long as society is simple
When is the barter system used?
when an economy collapses
What is COMMODITY MONEY?
when people in a region use a product as money (tobacco, cotton)
When does the commodity system work?
when the product is scarce.
What is commodity backed money?
when paper money and coin are backed up by some valuable comodity (gold or silver)
What is another name for commodity backed money?
What can commodity backed money save nation from?
What is fiat money?
paper money and coin is backed by nothing
Why do we believe in the value of our money?
because our government has been stable for so many years
What MUST the government do with fiat money?
balance the money supply
What will too much paper money in circulation cause?
What willl too little money cause?
interest rates to rise. Then businesses won't borrow and new jobs wont be created
Who has primary responsibility for balancing the money supply?
the FED ,federal reserve
what do the board of govorners do?
they are appointed by the president and make decisions for the economy
what does the federal open market committee do?
supervises the trading of t-bonds
what does the federal advisory committee do?
offers advice, but has little power
how many federal reserve banks are there?
12 serves as a bank for commercial banks
what is monetary policy?
the decisions the board of governers makes to balance the money supply
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
What is the discount rate
the interest rate a commercial bank pays to a federal reserve bank
what is a prime rate
the interest rate we pay to a commercial bank
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
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
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
what is moral suation?
when the board of governors asks congress for their help. Like raise taxes to contract money supply
What are commercial banks?
corporations trying to make a profit
what is economic growth?
increase in the number of goods/services avaliable in 1 years time
what does economic growth mean?
its good because it means that our standard of living is improving
what is economic growth caused by?
discovery of new resources or advances in technology
what is a nominal statistic?
raw data, collected info & no change
what is a real statistic?
what is the GDP?
gross domestic product- dollar value of all the final stuff produced in the US in 1 year
What is the GNP?
value of all final product produced by US companies operating all around the world
what is a good growth rate for the US per year?
what is the NI?
national income- total earned income by all businesses in the US in 1 year
what is the PI?
personal income- sum of household income in US in 1 year
what is the DI?
disposable income- amount of income avaliable after taxes (what we actually get to spend)
what does the government do with the national income statistics?
determine if they need to expand/contract the money supply
What is the formula for GDP/GNP?
C + I + E + G = GDP or GNP
what is the "C" in the equation?
consumer sector: total dollar value of final consumer goods. Durable and non durable
what is the "I" in the equation?
investment sector: total dollar value of all final capital products produced for US businesses in 1 year
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
what is the "G" in the equation?
government sector: all product that the government purchases
what is the CPI?
consumer price index; measures inflation in consumer product every 3 months
what is the WPI?
wholesale price index; meausres rent per sq ft and hourly cost of labor
What are the 4 rates of inflation?
creeping, walking, running, hyper inflation
What are the 2 theories on the cause of inflation?
cost push theory and demand pull theory
What is the cost push theory?
production costs increase, "pushing" up retail prices
What is demand pull theory?
excessive consumer demand creates shortages of the product increasing its price