Term
| What is the definition of money as used by economists? |
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Definition
| A special set of assets that are widely accepted as payments for goods and services. |
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Term
| What are the three functions of money? |
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Definition
1. Medium of Exchange
2. A unit of account
3. A store of value |
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Term
| Sam Student buys a new iPod for $200. In this example, money serves the role of what? |
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Definition
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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? |
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Definition
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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? |
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Definition
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Term
| Who determines the nation's money supply? |
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Definition
| The Federal Reserve System |
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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? |
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Definition
| The money supply would be expanded |
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Term
| If the central bank sells financial assets to the public or the government, what would happen to the money supply? |
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Definition
| The money supply would be reduced |
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Term
| Why do people keep currency in their pockets when bank deposits pay interest? |
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Definition
| Because currency is more liquid |
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Term
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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. |
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Term
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Definition
| Gold or a precious metal (Because if you melt down a $100 gold piece, you can sell the gold for $100) |
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Term
| What kind of money is included in M1? |
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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. |
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Term
| What kind of money is included in M2? |
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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). |
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Term
| Who created the concept of a "steady state"? |
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Definition
| Thomas Malthus and David Ricardo |
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Term
| When a system reaches "steady state", what is the value of profits earned? |
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Definition
| In the steady state, profits are equal to zero |
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Term
| When a system has reached "steady state", what amount of all available income does the total wage bill account for? |
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Definition
| In the steady state, the total wage bill accounts for all available income. |
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Term
| When a system is in "steady state", what is the only income share that can increase? |
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Definition
| In steady state, rent is the only income share which can increase. |
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Term
| In the Solow model, when does the system reach a steady state? |
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Definition
| The steady state is where s = (n+d)k |
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Term
| In the Solow Model, is technological change endogenous or exogenous? What is the role of technology in the model? |
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Definition
Technology is exogenous to the model; the model doesn't explain technological change.
There is no technology change in the model. |
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Term
| In the Solow model, what are the two factors that are being measured? (What is on the x and y axis)? |
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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. |
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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 |
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Definition
| Cash; Savings Account; U.S. Savings Bond; Land |
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Term
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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. |
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Term
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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. |
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Term
| What actions would the FED take during a recession to try to end it? |
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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. |
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Term
| Increases in checking account balances is an increase in what? |
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Definition
| Increases in checking account balances is an increase in M1. |
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Term
| What are the FED's three tools of monetary policy? |
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Definition
1. Open Market Operations
- money assets (M1 + M2)
-non-money assets (bonds)
2. Reserve Requirements
3. Discount Rate |
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Term
| What is the monetary policy of the FED? |
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Definition
1. To influence the money supply
2. To influence interest rates |
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Term
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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. |
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Term
| If the Reserve Requirement is 3%, what does this mean? |
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Definition
For every $100 in checking deposits, the bank must hold $3 in reserve.
Other $97? The bank can lend it out. |
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Term
| A disadvantage of the barter system is that: |
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Definition
| The opportunity to specialize is greatly reduced. |
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Term
| How does the expected rate of return on an asset affect its desirability? |
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Definition
| They are directly related - the higher the expected return, all else being equal, the more attractive the asset. |
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Term
| How does the level of risk affect an asset's desirability? |
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Definition
| They are inversely related - the higher the level of risk, all else being equal, the less desirable the asset. |
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Term
| How does the level of liquidity affect an asset's desirability? |
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Definition
| They are directly related - the more liquid the asset, all else equal, the more desirable the asset. |
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Term
| What are the 4 characteristics of an asset that are important when making the portfolio allocation decision? |
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Definition
1. Expected return
2. risk
3. liquidity
4. Time to maturity |
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Term
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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. |
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Term
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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) |
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Term
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Definition
| Ease with which an asset can be converted into money |
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Term
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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. |
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Term
| Compared to other assets, money has an expected return that is what? |
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Definition
| money has an expected return that is lower than other assets. |
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Term
| Compared to other assets, money has a risk level that is what? |
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Definition
| Money has a risk level that is lower than other assets. |
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Term
| Where does money rank in terms of liquidity? |
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Definition
| Money is considered the most liquid asset |
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Term
| What is money's time to maturity compared to other assets? |
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Definition
| Compared to other assets, money has the lowest time to maturity. |
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Term
| How is the price level related to nominal money demand? |
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Definition
| They are directly related - the higher the price level, the higher the demand for money. |
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Term
| How is the level of real income related to money demand? |
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Definition
| They are directly related - the higher the level of real income, the higher the demand for money. |
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Term
| How is the interest rate on other assets (stocks and bonds for example) related to money demand? |
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Definition
| They are inversely related - the higher the interest rate on other assets, the lower the demand for money. |
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Term
| What is the equation of exchange? |
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Definition
MV = PT, where
M = Ms
V = Velocity
P = Price level
T = # of transactions |
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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? |
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Definition
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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? |
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Definition
| They could raise M to 150 |
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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? |
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Definition
| V would have to rise to 4 |
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Term
| Under a situation of asset market equilibrium... |
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Definition
| the quantity of money supplied equals the quantity of money demanded. |
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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? |
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Definition
| The money supply must grow by 10% a year, even if velocity is constant. |
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Term
| Which of the following measures (M1, M2, M3) is the best measure of money as a medium of exchange? |
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Definition
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Term
| What is the most common way for a central bank to reduce the money supply? |
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Definition
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Term
| People's best guesses about returns on assets are called |
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Definition
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Term
| The set of assets that a holder of wealth chooses to own is called what? |
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Definition
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Term
| The uncertainty about the return an asset will earn is what? |
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Definition
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Term
| The ease and quickness with which an asset can be exchanged for goods, services, or other assets is called what? |
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Definition
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Term
| Time to maturity refers to the amount of time until what? |
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Definition
| an asset repays the principal to an investor |
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Term
| In terms of risk and liquidity, compared with money, bonds are what? |
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Definition
| more risky and less liquid |
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Term
| What is one of the least liquid types of assets? |
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Definition
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Term
| A 10% decrease in real income usually leads to ________ in money demand. |
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Definition
| a decrease of less than 10% |
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Term
| What will most likely lead to an increase of 1% in the nominal demand for money? |
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Definition
| an increase of 1% in the price level |
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Term
| The opportunity cost of holding currency decreases when... |
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Definition
| the interest rate on bonds decreases |
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Term
| An increase in expected inflation is likely to cause what? |
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Definition
| A decline in the demand for real balances |
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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? |
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Definition
| The money supply must grow by 6% a year, even if velocity is constant. |
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