Unit 4

Question 1

Barter System

Answer 1

Goods and services are traders directly. No money or currency exchanged.

Question 2

Barter system issues

Answer 2

Before trade could occur each trader had to have something the other wanted. This is called the “double coincidence of wants”

Some goods cannot be split. If one goat is worth 5 chickens how do you exchange if you want 1 chicken

Question 3

Money

Answer 3

Anything that is generally accepted in payment for goods and services. NOT the same as wealth or income.

Question 4

Wealth

Answer 4

Total collection of assets

Question 5

Income

Answer 5

Flow of earnings per unit of time

Question 6

3 functions of money

Answer 6

1) medium of exchange
2) unit of account (money acts as a measurement of value)
3) Store of value ( money allows you to store purchasing power for the future.

Question 7

Commodity money

Answer 7

Something that performs the function of money and has intrinsic value

Question 8

Intrinsic

Answer 8

Essential/valuable on its on

Gold, cows

Question 9

Representative money

Answer 9

Signifies ownership of valuable goods but have no intrinsic value
Ex) checks, treasury note

Question 10

Fiat money

Answer 10

Something that serves as money but had no other value or uses
Ex) paper money, coins, digital currency

IS NOT a source of intrinsic value

Question 11

Inflation increases …..

Rapid inflation…..

Answer 11

Inflation increase decrease purchasing power

Rapid inflation decreases acceptability

Question 12

Gold standard

Answer 12

Money is gold abandoned in Great Depression

Question 13

Liquidity

Answer 13

Ease with which an asset can be accessed and used as a medium of exchange

Question 14

M1

Answer 14

HIGHEST LIQUIDITY

• currency in circulation (money in pocket)
• checkable bank deposits (checking accounts)
• travelers checks

Question 15

M2

Answer 15

NEAR MONEYS

• savings depositions
• time deposits (COs =certificates of deposit)
• Money market funds

-INCLUDES EVERYTHING INSIDE M1

Question 16

M1 and M2 often hold…?

Answer 16

Little to no interest so the opportunity cost of holding liquid money is the interest you could be earning.

Question 17

MB (Monetary Base)

Answer 17

Sometimes Mo
MORE LIQUID THAN M1
-currency in circulation
-bank reserves

THIS IS WHAT THE FEDERAL RESERVE MANIPULATES TO GROW M1 OR M2

Question 18

Financial Sector

Answer 18

Network of institutions that link borrowers and lenders including banks, mutual funds, pension funds, and other financial intermediaries

Question 19

Assets

Answer 19

Anything tangible or intangible that is owned

Question 20

Liability

Answer 20

Anything that is owed

Question 21

Loan

Answer 21

An agreement between a lender and a borrower usually at a fee called the interest rate

ASSET LENDER, LIABILITY BORROWER

Question 22

Fractional Reserve Banking

Answer 22

When banks hold only a small portion of deposits to cover potential withdrawals and then loans the rest of the money out

Question 23

Demand deposits

Answer 23

Money deposited in a commercial bank in a checking account

Question 24

Required reserves

Answer 24

Bank must hold 10% of money by law

Question 25

Excess reserves

Answer 25

Amount the bank can loan out

Question 26

Effects on money supply (change)

Answer 26

1) banks make more loans 2) fed reserve creates new reserves MONEY POCKET TO BANK= NO CHANGE MONEY BANK TO BANK= NO CHANGE

Question 27

Deposit expansion multiplier

Answer 27

1/rr

Question 28

Creation of new money (formula)

Answer 28

Excess reserves x multiplier

Question 29

Required reserves

Answer 29

Required Reserves x Deposits

Question 30

Who runs the fed reserve

Answer 30

The board of governors(14 year term) Decisions are not sent to president or congress for approval.

Question 31

Bank run

Answer 31

When people lose faith in the security of the bank and rush to withdraw all their money at once Lead to financial panics People stop spending > loans hard to get>credit drys up, halting economy> bank runs out of people’s money

Question 32

As discount rate changes how does it effect money supply

Answer 32

Decreased rate, increased MS | Increased rate, decreased MS

Question 33

Opening market operations effect on money supply

Answer 33

Buying bonds, increase MS | Selling bonds, decrease MS

Question 34

Money market demand shifters

Answer 34

1) changes in PL 2) changes in income 3) changes in technology

Question 35

Transaction demand for $

Answer 35

People hold $ for everyday transactions

Question 36

Asset demand for $

Answer 36

People hold $ since it’s less risky than other assets

Question 37

If Interest rates increase the want to hold money (cash) will…

Answer 37

Decrease

Question 38

Relationship between interest rates and investment spending

Answer 38

Inverse

Question 39

Increasing the money supply during a recession…

Answer 39

EXPANSIONARY | increases AD, interest rates fall

Question 40

Decreasing money supply….

Answer 40

Temporary shortage of money will occur at 5% interest. This shortage will cause interest rates to rise to 10% This decreases AD

Question 41

Real interest rate

Answer 41

% increase in purchasing power that a borrower pays (adjusted for inflation)

Question 42

NoMinsk interest rate

Answer 42

% increase in money that the borrower pays not adjusted for inflation Real interest rate + expected inflation

Question 43

Loanable funds market demand shifters

Answer 43

1)Change in perceived business opportunities a) consumer confidence in economy b) tax credits 2)Changes in govt borrowing (Budget deficit or surplus) Inverse relationship between real interest rate and quantity loans demanded

Question 44

Loanable funds market supply shifters

Answer 44

1) change in savings 2) changes in foreign investments 3) change in expected profitability a) gov taxes on interest b) fed buy/sell bonds Direct relationship between interest and quantity loans supplied

Question 45

What if gov increases deficit spending

Answer 45

Real interest rates cause CROWDING OUT | Investments fall

Question 46

Quantity theory of money

Answer 46

M x V = P x Q M=supply of money V= velocity of money P= PL Q= output/RGDP/Y

Question 47

Short run Phillips curve

Answer 47

Inverse relationship Dot moves along line (SRPC) Shift left: increase AS shift right: decrease AS Stagflation: SRPC curve moves right

Question 48

Long run Phillips curve

Answer 48

Shift left - decrease Un - gov investment in human capital decrease Shift right - increase natural rate of unemployment (Un) - gov investment in human capital increase