Term
| What is the monetary base?; who controls it? |
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Definition
| the sum of currency in circulation and bank reserves; controlled by the monetary authority |
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Term
| How many members are on the Federal Open Market Committee (FOMC)? |
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Definition
| FOMC is made up of 12 members:7 Board of Governors, the president of NY Federal Reserve Bank, and 4 presidents from the other 11 Federal Reserve Banks presidents. |
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Term
| What is the main function of the FOMC? |
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Definition
| charged under United States law with overseeing the nation's open market operations |
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Term
| What is the meaning of fractional reserve banking system? |
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Definition
| system in which commercial banks and the saving & loan banks are required to hold only a fraction of their checkable deposit liabilities as cash reserves in their vaults or with the district federal reserve bank |
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Term
| What is reserve requirement? Reserve ratio? Money multiplier? |
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Definition
Reserve Ratio is the fraction of bank deposits that a bank holds as reserves
Reserve Requirements are rules set by the Fed that determine the min reserve ratio for a bank
Money Multiplier is the ratio of the money supply to the monetary base (1/reserv req) |
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Term
| What is the difference between required reserves and excess reserves? |
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Definition
Required reserves are reserves that a bank is legally required to hold.
Excess reserves are reserves held over and above the required reserves. |
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Term
| how do you calculate required/excess reserves |
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Definition
required as determined by reserve ratios.
excess reserves - actual - required reserves |
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Term
| What are the determinants of the demand for money? Why is the demand for money curve negatively sloped? |
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Definition
a higher interest rate leads to a higher opportunity cost of holding money
since a higher opportunity cost of holding money reduces the nominal quantity of money demanded. |
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Term
| What happens to the demand of money curve when the income level or the price level increase/decrease? |
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Definition
| Increases in the price level and income shift the demand for money curve to the right, because more money will be needed when the price level or the income level increases |
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Term
| What're jobless recoveries? |
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Definition
| recovery from a recession which does not produce strong growth in employment |
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Term
| How many members are in the Board? Are they elected or appointed to the Board? |
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Definition
| The Board of Governors consists of 7 members appointed by the president with the approval of the Senate for 14-year term. |
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Term
| how do you calc velocity of money |
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Definition
| nominal GDP divided by nominal quantity of money |
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Term
| what is real quantity of money/ how calculated? |
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Definition
| nominal quantity of money divided by aggregate price level; quantity of money adjusted4the purch power of a dollar |
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Term
| what is the money equation? |
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Definition
MV = PY
where M represents quantity of money in circulation
V represents velocity of money
P represents aggregate price level
Y represents aggregate output |
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Term
| • What are the three types of unemployment? Which types of unemployment rates make up the natural rate of unemployment? |
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Definition
When the cyclical unemployment is zero, what will the actual unemployment rate equal to?
frictional unemployment: due to time workers spend in job search
structural unemployment: results when there are more people seeking jobs in labor market that there are jobs available at the current wage rate
cyclical unemployment: the diff. in the actual rate from the natural rate of unemployment; structural |
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Term
| How does unemployment insurance affect unemployment? |
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Definition
| increases time workers takes to find a job and increases frictional unemployment |
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Term
| Why do employers pay efficiency wages? |
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Definition
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Term
| What is meant by Okun’s law? How is output gap computed? How is unemployment related to the output gap? |
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Definition
each additional percentage point of output gap reduces the unemployment rate by <1%
(unemployment rate = natural rate of unemployment);
output gap = percentage of potential output – 1;
unemployment/output gap hav neg relation |
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Term
| What does the short-run Phillips curve show? Why's this true? |
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Definition
| the negative relation between inflation rate unemployment rate... |
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Term
| If people expect a higher rate of inflation, what will happen to the Phillips curve? Is there a relationship between unemployment and inflation in the long-run? |
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Definition
SRPC shifts up by the amount of the increase in expected inflation;
The LRPC is vertical, no long-run trade-off between unemployment and inflation exists |
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Term
• What international transactions are included in merchandize trade balance, current account balance, and financial account balance?
Merchandise trade balance is the diff between a country’s exports and imports of goods alone – not including services
current acct balance: consists of balance of payments on goods&servs plus net international transfer payments and net international factor income
Financial account balance: the difference between a country’s sales of financial assets to foreigners and its purchases of financial assets from foreigners. |
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Definition
Merchandise trade balance:diff between country’s exports/imports of goods alone – not including services
current acct balance: consists of balance of payments on goods&servs+net international transfer payments+net international factor income
Financial account balance:diff between country’s sales of financial assets to and purchases from foreigners. |
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Term
| What is a nominal exchange rate? What is the difference between a nominal exchange and a real exchange rate? |
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Definition
Price of one currency in terms of another currency is called the nominal exchange rate.
The real exchange rate is the nominal exchange rate adjusted for the differences in the aggregate price levels of the two countries. |
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Term
| What is meant by currency appreciation/depreciation? |
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Definition
| If the demand for a currency increases/decreases, the currency appreciates/depreciates - its value in terms of other competing currencies increases. |
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Term
| What makes a currency to appreciate/depreciate? |
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Definition
| Devaluation is usually undertaken when a country faces balance of payment deficits. |
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Term
| What does the purchasing power parity (PPP) theory predict? |
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Definition
| is based on the law of one price: the theory states that, in ideally efficient markets, identical goods should have only one price. |
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Term
| What is the difference between a fixed exchange rate and a floating exchange rate? |
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Definition
A country has a fixed exchange rate when the government keeps the exchange rate of its currency at a particular value against another currency.
floating is flexible |
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Term
| What are the functions of money? |
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Definition
1. Medium of exchange
2. Store of Value
3. Unit of Account |
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Term
| What are the functions of Fed (the Federal Reserve System)? |
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Definition
Controls the money supply through open market operations
Sets the discount rate – the interest rate Fed charges on loans to banks
Sets the required reserve ratio - reduces RR ratio to increase money supply and increases RR ratio to decrease money supply.
Conducts open market operations - OMO is buying or selling government securities or bonds.
Open market purchase of gov. securities increases money supply and open market sale of gov. securities decreases the money supply. |
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Term
| What happens to the demand of money curve when the income level or the price level increase/decrease? |
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Definition
| Increases in the price level and income shift the demand for money curve to the right, because more money will be needed when the price level or the income level increases |
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Term
| Who controls the money supply in the U.S? |
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Definition
| The Fed controls supply of money through purchase and sale of Treasury bills, changing the required reserve ratio, or changing the discount rate; |
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Term
| What are the advantages and disadvantages of a both exchange rate systems? |
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Definition
Fixed exchange rates reduce exchange rate uncertainty but require a country to hold large reserves of foreign currency to keep the exchange rate fixed.
floating exchange rates can cause uncertainty for business |
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Term
| What is meant by currency devaluation? Currency revaluation? How does currency devaluation affect a country’s exports and imports? |
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Definition
| A devaluation is a reduction in the value of a currency under a fixed exchange rate by an official order – makes domestic goods cheaper in terms of foreign currencies – increases exports but decreases imports – vice versa for revaluation. |
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Term
| What are foreign exchange controls and wat's there purpose? |
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Definition
licensing systems that limit the right of individuals to buy foreign currency;
other things equal, these increase the value of a country's currency |
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