Unit 4

Question 1

Commodity money

Answer 1

Money that has intrinsic value (gold or silver)

Question 2

Fiat money

Answer 2

Money with no intrinsic value ex cash

Question 3

Stocks

Answer 3

Shares of a company you can own

Question 4

Bond

Answer 4

An iOU made by the government

Question 5

Transaction demand for money

Answer 5

When a person demands money in order to buy something as in a transaction

Question 6

Asset demand money

Answer 6

When money is demanded to buy assets, such as stocks and stuff

Question 7

Reserve requirements

Answer 7

The required percent set by the fed of money that the banks need to hold.

Question 8

What reserve requirement does. And how it shifts

Answer 8

It changes the money supply

• increase for a decrease in the MS
• Decrease for a decrease in MS

Question 9

What is the discount rate and how does it shift

Answer 9

The minimum interest rate set by banks for lending to other banks

• Increase discount rate to reduce MS
• decrease discount rate to increase MS

Question 10

Open market operations and how they shift

Answer 10

The buying and selling of treasury bonds

Buy bonds to increase the money supply
Sell bonds to decrease the money supply

Question 11

How are Interest rates related to investment spending

Answer 11

Inversely. High interest, means small investments

More money made on interest

Question 12

How is the money supply related to the AG

Answer 12

They are directly related

Question 13

The three functions of money

Answer 13

Medium of exchange, unit of account, store of value

Question 14

Money multiplier

Answer 14

1/rr this is multiplied with the amount the bank can lend out, not the total deposit

Question 15

Money market graph

Answer 15

Supply of money (vertical)
Demand for money(downward sloping)
Y axis: nominal interest rates
X axis: quantity of money

Question 16

Investment market graph

Answer 16

Investment demand( downward sloping)
Y axis:rate of interest 
X axis:amount of investment

Question 17

How does and increase in money supply affect money market

Answer 17

Shifts MS to the right

Question 18

How does and increase in money supply affect investment

Answer 18

Shift along the curve to the right

Question 19

How does and increase in money supply affect AD/AS

Answer 19

Increase aggregate demand

Question 20

How the fed fixes a recessionary gap

Answer 20

Decrease reserve requirements
Decrease discount rate
Buy treasury bonds

Question 21

How does the Fed combat an inflationary gap

Answer 21

Raise reserve requirement
Raise discount rate
Sell treasury bonds

Question 22

Wealth

Answer 22

The value of accumulated savings

Question 23

Physical assets

Answer 23

A valid on tangible objects that gives the owner right to claim it as a form of money

Question 24

Financial asset

Answer 24

Paper claim that entitles buyer to future income from seller

Question 25

Liability

Answer 25

Requirement to pay money in the future

Question 26

Liquid

Answer 26

How quickly something can be converted into cash without s loss of value

Question 27

Illiquid

Answer 27

Can't be converted into money without loss of value

Question 28

M1 money

Answer 28

Currency in circulation, travelers checks, and checkable bank deposits

Question 29

M2 money

Answer 29

All of M1 plus everything that can be converted into cash

Question 30

Shifters of money demand curve

Answer 30

Aggregate price level (directly related) GDP (directly related) Information technology (inversely related) Income (directly related)

Question 31

Liquidity preference model of interest rates.

Answer 31

Interest rate is determined by the supply and demand of money

Question 32

Money supply curve

Answer 32

A vertical curve, can be moved by the federal reserve

Question 33

Bank run

Answer 33

Withdraw phenomenon where many bank depositors try to withdraw their funds due to fear of bank failure

Question 34

Deposit insurance

Answer 34

Guarantees that deposit will be paid even if there is no funds. Fed will pay

Question 35

How do banks affect the money supply

Answer 35

Remove currencies in circulation | Create money though loans and deposits

Question 36

How do open market operations change money supply

Answer 36

``` Buy big (increase) Sell small (reduce) ```

Question 37

Loanable funds graph

Answer 37

``` Supply LF (positive slope) Demand LF (negative slope) Y axis: interest rate X axis: quantity of Loanable funds ```

Question 38

Demand of Loanable funds shifters

Answer 38

``` Changes in beliefs of rate of return (direct) Changes in give borrowing (direct) Crowding out (inverse) ```

Question 39

Supply of Loanable funds shifters

Answer 39

``` Private savings change (direct) Capital inflow (direct) ```

Question 40

Fisher effect

Answer 40

An increase in expected future inflation drives up the nominal interest rate by the same number of points leaving expected and real the same

Question 41

If interest is up a bond costs

Answer 41

More

Question 42

If interest rates are low then bonds

Answer 42

Are cheap