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Econ 102
Quiz 4
24
Economics
Undergraduate 2
11/15/2011

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Term
Double coincidence of wants
Definition
Two traders directly exchanging products
As variety of goods increases, exchange rates can change between diff. goods so becomes less and less rational
Term
Gresham's Law
Definition
People tend to trade away inferior money and hoard the best
Term
Seigniorage
Definition
Difference between face value of money and cost of supplying it
"Profit" from issuing money
Term
Fiat money
Definition
Money that is money because the gov says so
Backed by nothing
Term
Federal Reserve Banks (Fed)
Definition
Bank's Bank
Term
Federal Open Market Committee
Definition
Makes decisions on buying and selling gov. securities
Term
Interest-rate ceilings on deposits
Definition
led to banks losing deposits whenever market rates went above the ceiling rates
Term
Subprime mortgage
Definition
Mortgage in which the borrower has a poor credit rating
Term
M1 money supply
Definition
coins and currency held by the nonbank public, checkable deposits, and traveler's checks
Term
Most liquid asset
Definition
cash in bank's vault
Yields no interest
Term
Simple money multiplier
Definition
Opposite of reserve rate ratio (so 1/r)
If banks allow some of their excess reserves to remain in the vault-the simple money multiplier will exceed the actual money multiplier
Term
Discount Rate
Definition
Interest rate the Fed charges banks that borrow reserves
Term
Fed's purchase of U.S. gov. securities constitutes...
Definition
an expansionary policy because it raises amount of total reserves in banking system
Term
In deciding how much money to hold, you should compare the...
Definition
advantage of liquidity with the disadvantage of losing interest
Term
As price level rises, money___, causing interest rates to ____ and investment to ____
Definition
money demand rises causing
interest rates to rise
and investment spending to fall
Term
Equation of exchange
Definition
Real GPD=money in circulation x velocity
Term
Economic theory suggests that
Definition
rapid growth in money supply leads to rapid growth in the price level
Term
Why self-correction works to close a contractionary gap
Definition
Labor surplus causes money wages to fall
Term
Economists of rational expectations school believe expansionary monetary policy is fully effective only if
Definition
The policy is totally unexpected
Term
If resource owners anticipated a monetary growth rate higher than actual
Definition
output would fall
Term
Time inconsistency problem
Definition
When policy makers have an incentive to announce one policy to influence expectations but then pursue a different policy once those expectations have been formed and acted on
Term
Countries with lowest interest rate
Definition
have least independent central banks
Term
Rationale for a fixed-growth-rate monetary policy
Definition
Not possible to certainly determine what's happening in the economy, so easy to make mistakes w/active policy
Term
Fact: Gov policy that results in low inflation is generally the optimal long-run policy.
Definition
True
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