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Chapter 7
Econ 320
65
Economics
Undergraduate 3
04/03/2012

Additional Economics Flashcards

 


 

Cards

Term
What is the definition of money as used by economists?
Definition
A special set of assets that are widely accepted as payments for goods and services.
Term
What are the three functions of money?
Definition

1. Medium of Exchange

 

2. A unit of account

 

3. A store of value

Term
Sam Student buys a new iPod for $200. In this example, money serves the role of what?
Definition
medium of exchange
Term
Sam Student saved $15 every week for the past 10 weeks in order to buy an iPod. In this example, money serves as the role of what?
Definition
store of value
Term
While shopping, Sam Student noticed that an iPod was priced at $200, a competing MP3 player was selling for $100. When he realized that the iPod was twice as expensive as the MP3 player, money served the role of what?
Definition
unit of account
Term
Who determines the nation's money supply?
Definition
The Federal Reserve System
Term
If all money is in the form of currency, what would happen to the money supply if the central bank uses newly minted currency to buy financial assets from the public or directly from the government itself?
Definition
The money supply would be expanded
Term
If the central bank sells financial assets to the public or the government, what would happen to the money supply?
Definition
The money supply would be reduced
Term
Why do people keep currency in their pockets when bank deposits pay interest?
Definition
Because currency is more liquid
Term
What is fiat money?
Definition

Fiat money is money where the value comes from the word of the government.

 

Value of money is value of decree or order or fiat.

Term
What is non-fiat money?
Definition
Gold or a precious metal (Because if you melt down a $100 gold piece, you can sell the gold for $100)
Term
What kind of money is included in M1?
Definition

1. Currency (bills & coins)

 

2. Checking deposits

 

3. Traveler's checks

 

M1 is the most liquid form of money; it most easily satisfies the 3 functions of money. Everyone accepts it in payment for goods and services.

Term
What kind of money is included in M2?
Definition

1. Time deposits (Savings accounts)

 

2. Money Market Funds or MMFs (Investments in short term securities)

 

3. Savings deposits

 

M2 is not as readily accepted as M1 for goods and services. There is a lot more money invested in M2 than in M1 (In June 2009, M1 = $1.65 trillion and M2 = $8.4 trillion).

Term
Who created the concept of a "steady state"?
Definition
Thomas Malthus and David Ricardo
Term
When a system reaches "steady state", what is the value of profits earned?
Definition
In the steady state, profits are equal to zero
Term
When a system has reached "steady state", what amount of all available income does the total wage bill account for?
Definition
In the steady state, the total wage bill accounts for all available income.
Term
When a system is in "steady state", what is the only income share that can increase?
Definition
In steady state, rent is the only income share which can increase.
Term
In the Solow model, when does the system reach a steady state?
Definition
The steady state is where s = (n+d)k
Term
In the Solow Model, is technological change endogenous or exogenous? What is the role of technology in the model?
Definition

Technology is exogenous to the model; the model doesn't explain technological change.

 

There is no technology change in the model.

Term
In the Solow model, what are the two factors that are being measured? (What is on the x and y axis)?
Definition

The Solow model says that output per worker (Y/N) depends on capital per worker (K/N).

 

Output per worker is on the y axis, and capital per worker is on the x axis.

Term

Rank the following assets in terms of liquidity, from the most liquid to the least liquid:

a) Savings Account

b) Cash

c) Land

d) a U.S. Savings Bond

Definition
Cash; Savings Account; U.S. Savings Bond; Land
Term
Open Market Operations
Definition

Is the most powerful tool of monetary policy at the disposal of the FED.

 

Is based on a transfer of ownership of non-money assets for money.

 

Affects checking account deposits which is part of M1.

Term
Bonds
Definition

Yield an interest rate which is (face value - market price/face value).

 

Have a market price which can be greater than, less than, or equal to the face value.

 

Have a face value which is the amount of money to be paid to te owner when the bond matures.

Term
What actions would the FED take during a recession to try to end it?
Definition

The FED would try to increase M1 in order to increase economic activity.

 

The FED would buy non-money assets and pay with money.

Term
Increases in checking account balances is an increase in what?
Definition
Increases in checking account balances is an increase in M1.
Term
What are the FED's three tools of monetary policy?
Definition

1. Open Market Operations

- money assets (M1 + M2)

-non-money assets (bonds)

 

2. Reserve Requirements

 

3. Discount Rate

Term
What is the monetary policy of the FED?
Definition

1. To influence the money supply

 

2. To influence interest rates

Term
Reserve Requirement
Definition

The reserve requirement is the % of checking deposits that the bank must hold as either:

 

a) cash in their vault, or

 

b) deposits at the FED.

Term
If the Reserve Requirement is 3%, what does this mean?
Definition

For every $100 in checking deposits, the bank must hold $3 in reserve.

 

Other $97? The bank can lend it out.

Term
A disadvantage of the barter system is that:
Definition
The opportunity to specialize is greatly reduced.
Term
How does the expected rate of return on an asset affect its desirability?
Definition
They are directly related - the higher the expected return, all else being equal, the more attractive the asset.
Term
How does the level of risk affect an asset's desirability?
Definition
They are inversely related - the higher the level of risk, all else being equal, the less desirable the asset.
Term
How does the level of liquidity affect an asset's desirability?
Definition
They are directly related - the more liquid the asset, all else equal, the more desirable the asset.
Term
What are the 4 characteristics of an asset that are important when making the portfolio allocation decision?
Definition

1. Expected return

2. risk

3. liquidity

4. Time to maturity

Term
Expected return
Definition

Expected increase in the value of the asset; rate of return.

 

Higher return means more consumption in the future, which makes demand higher for that asset.

Term
Risk
Definition

Chance that the actual return is not going to be equal to the expected return.

 

The question is, will the return be more than, equal to, or less than the return on a riskless asset (U.S. Government Bond)

Term
Liquidity
Definition
Ease with which an asset can be converted into money
Term
Time to Maturity (TTM)
Definition

Time until the asset matures and the owner gets paid.

 

Tradeoff: TTM and the return

- Shorter TTM = lower return

- Longer TTM = higher return

Generally, people prefer shorter TTM.

Term
Compared to other assets, money has an expected return that is what?
Definition
money has an expected return that is lower than other assets.
Term
Compared to other assets, money has a risk level that is what?
Definition
Money has a risk level that is lower than other assets.
Term
Where does money rank in terms of liquidity?
Definition
Money is considered the most liquid asset
Term
What is money's time to maturity compared to other assets?
Definition
Compared to other assets, money has the lowest time to maturity.
Term
How is the price level related to nominal money demand?
Definition
They are directly related - the higher the price level, the higher the demand for money.
Term
How is the level of real income related to money demand?
Definition
They are directly related - the higher the level of real income, the higher the demand for money.
Term
How is the interest rate on other assets (stocks and bonds for example) related to money demand?
Definition
They are inversely related - the higher the interest rate on other assets, the lower the demand for money.
Term
What is the equation of exchange?
Definition

MV = PT, where

 

M = Ms

V = Velocity

P = Price level

T = # of transactions

Term

M = 100, V = 3, P = 10, T = 30

 

If V and T were to remain constant and M doubled to 200, what would happen to P?

Definition
P would rise to 20
Term

M = 100, V = 3, P = 10, T = 30

 

If V falls to 2 in a recession what could the FED do to maintain current levels of economic activity?

Definition
They could raise M to 150
Term

M = 100, V = 3, P = 10, T = 30

 

If M falls to 75 in a recession what would you have to do to V to maintain economic activity?

Definition
V would have to rise to 4
Term
Under a situation of asset market equilibrium...
Definition
the quantity of money supplied equals the quantity of money demanded.
Term
If the population grows by 2%, productivity grows by 3%, and the FED wants a 5% inflation rate as a way of reducing unemployment, then to stimulate growth what must happen?
Definition
The money supply must grow by 10% a year, even if velocity is constant.
Term
Which of the following measures (M1, M2, M3) is the best measure of money as a medium of exchange?
Definition
M1
Term
What is the most common way for a central bank to reduce the money supply?
Definition
Sell bonds to the public
Term
People's best guesses about returns on assets are called
Definition
expected returns
Term
The set of assets that a holder of wealth chooses to own is called what?
Definition
a portfolio
Term
The uncertainty about the return an asset will earn is what?
Definition
risk
Term
The ease and quickness with which an asset can be exchanged for goods, services, or other assets is called what?
Definition
liquidity
Term
Time to maturity refers to the amount of time until what?
Definition
an asset repays the principal to an investor
Term
In terms of risk and liquidity, compared with money, bonds are what?
Definition
more risky and less liquid
Term
What is one of the least liquid types of assets?
Definition
houses
Term
A 10% decrease in real income usually leads to ________ in money demand.
Definition
a decrease of less than 10%
Term
What will most likely lead to an increase of 1% in the nominal demand for money?
Definition
an increase of 1% in the price level
Term
The opportunity cost of holding currency decreases when...
Definition
the interest rate on bonds decreases
Term
An increase in expected inflation is likely to cause what?
Definition
A decline in the demand for real balances
Term
If the population grows by 1%, productivity grows by 2%, and the FEW wants a 3% inflation rate as a way of reducing unemployment, then to stimulate growth what must happen to the money supply?
Definition
The money supply must grow by 6% a year, even if velocity is constant.
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