Term
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Definition
| objects used as money, with intrinsic value. ex: gold, silver, cigarettes |
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Term
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Definition
| objects used as money, without intrinsic value. ex: electronic entries, useless paper, dollars, Euros, "Ithica hours" |
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Term
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Definition
| an arbitrary decree or pronouncement. created by government/king, but in our use doesn't have to be |
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Term
| Does fiat or commodity money cost more? |
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Definition
| commodity money has an opportunity cost (rare minerals/metals), while fiat money is chosen because it is cheap |
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Term
| Fiat money supply has a relatively low... |
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Definition
| maintenance/opportunity cost |
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Term
| High inflation is caused directly by... |
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Definition
| high rates of money growth |
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Term
| Under a commodity money system, how is the money supply kept in control? |
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Definition
| the production cost of the commodity used for money |
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Term
| Uder a fiat money system, is the money supply kept in control like a commodity money system is? |
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Definition
| no, cost of producing money is cheap |
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Term
| Why would a country anchor their currency to another's? |
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Definition
| The other country would have a stable currency, so their currency would have a more consistent value and not be as susceptible to inflation |
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Term
| What are three ways of anchoring a country's currency? |
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Definition
| (1) fixed exchange rates, (2) currency boards, (3) dollarization |
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Term
| What is the other option other than anchoring a country's currency (the way the US does it)? |
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Definition
| floating exchange rates, basically the country makes the value |
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Term
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Definition
| using another country's currency directly - like using a commodity, taking a real resource to produce the currency |
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Term
| What are fixed exchange rates? |
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Definition
| allows fixed-rate conversion of a currency to gold or US dollar, but this has problems with credibility of the origin and converting currency |
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Term
| What are currency boards? |
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Definition
| fixed exchange rate to currency/gold/reserves, with close to 100% backing by what the country actually HAS (no credibility problems) |
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Term
| What is the Money Supply in a currency-only economy? |
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Definition
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Term
| What is the Money Supply in a fractional reserve banking economy? |
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Definition
| M=mm*BASE, where mm=(cu+1)/(cu+res), where cu=CU/DEP and res=RES/DEP |
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Term
| Who determines the BASE? What is the BASE? |
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Definition
| BASE is determined by the central bank, and is currency+reserves |
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Term
| Who determines CU? What is CU? |
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Definition
| CU (and therefore "cu") is determiend by the nonbank public. It is currency. |
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Term
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Definition
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Term
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Definition
| RES/DEP, or the reserve requirement |
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Term
| Who determines RES? What is RES? |
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Definition
| RES is determined by the banking sector. It is reserves. RES=vault cash+loans from other banks or lending institutions |
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Term
| Who controls reserve requirements? |
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Definition
| Banking sector, partially the Fed ("res" is this requirement) |
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Term
| What are some of the monetary policy tools of the Fed? |
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Definition
| changing the monetary base, reserve requirements (from the banking sector), and discount window lending |
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Term
| How does the Fed get to "intermediate" monetary policy targets (like small changes)? |
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Definition
| changing their interest rate to spur or supress borrowing, suppress or spur lending |
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Term
| During the Great Depression, "cu" did what? Why? |
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Definition
| went up until the band holiday, then went back down after people began to trust the banks again |
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Term
| During the Great Depression, "res" did what? Why? |
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Definition
| continued to go up, had to in order to prevent bank runs in the future |
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Term
| During the Great Depression, "mm" did what? Why? |
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Definition
| declined, because of bank panics, which caused mistrust |
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Term
| During the Great Depression, "BASE" did what? Why? |
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Definition
| increased steadily, because Fed wanted to try to keep the money supply up |
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Term
| During the Great Depression, "M" did what? Why? |
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Definition
| decreased sharply, until bank holiday, then began to increase |
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Term
| If the Fed is selling assets to open market, it is trying to _______ the economy in a __________ policy move. |
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Definition
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Term
| If the Fed is purchasing assets in open market, it is trying to ______ the economiy in a __________ policy move. |
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Definition
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Term
| A contractionary policy move by the Fed is usually recognized by... |
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Definition
| the Fed selling assets to open market |
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Term
| An expansionary policy move by the Fed is usually recognized by... |
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Definition
| the Fed buying assets on the open market |
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Term
| The effect of a contractionary or expansionary policy move by the Fed can be found by... |
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Definition
| mm*(change in the BASE)=(change in M) |
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Term
| What is Money supply the addition of? |
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Definition
| deposits from the public + currency |
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Term
| Why do banks reloan out money? |
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Definition
| opportunity cost of holding reserves, incentive to economize them |
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Term
| Reserve ratios today are... |
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Definition
| phased out/lowered, but banks hold excess reserves anyway |
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Term
| The Fed must pay interest on reserves now, at a rate of .25%, which means.. |
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Definition
| institutions that get money from them have the cost added to the money they keep in reserves, which is an incentive to just leave it at the Fed and not lend it out |
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Term
| What is Discount Window Lending? |
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Definition
| allows certain institutions to borrow directly from the central bank, due to external or internal temporary and extreme losses of liquidity.....Fed is "lender of last resort" |
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Term
| One large condition that the institution must accept to get Fed money is... |
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Definition
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Term
| What is the Fed funds rate? |
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Definition
| rate at which banks lend money to each other |
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Term
| What is the discount rate, or interest rate? |
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Definition
| the rate at which Fed lends to banks |
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Term
| Until 2003, Fed funds rate was lower or higher than discount rate? |
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Definition
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Term
| After 2003, the Fed funds rate was lower or higher than discount rate? |
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Definition
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Term
| What are two types of loans via the Fed that a bank can get since 2003? |
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Definition
| primary credit discount loan, secondary credit discount loan |
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Term
| A primary creidt discount loan has |
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Definition
| a lower rate, no supervision |
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Term
| A secondary credit discount loan has |
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Definition
| a higher rate, supervision |
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Term
| Why did policy change in 2003 to lower the Fed funds rate? |
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Definition
| Fed wanted to regain position as lender of last resort, and smooth fluctuations in federal funds rate |
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Term
| Nominal money demand is proportional to... |
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Definition
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Term
| Real money demand depends on... |
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Definition
| GDP (positively correlated, more transactions needs more money), Nominal interest rate (negatively correlated, opportunity cost of holding money), elasticities of L(Y, i) |
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Term
| Velocity is another way to look at... |
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Definition
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Term
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Definition
| the flow of transactions over a time period, with a stock of nominal money |
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Term
| Velocity is the measure of... |
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Definition
| how many transactions (over a period) can be conducted with one unit of money |
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Term
| Transactions velocity, Vt= |
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Definition
| nominal transactions / nominal money supply, or (P*TR)/M.....units are transactions/year... |
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Term
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Definition
| nominal GDP / nominal money supply, or (P*Y)/M...units are transactions/year.... |
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Term
| What is the quantity equation? |
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Definition
| MV=PY, or (money supply)*(avg # transactions)=nominal GDP=(Price)*(avg income) |
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Term
| What does the quantity equation give? |
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Definition
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Term
| Nominal money demand tells us... |
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Definition
| how many dollars people want to hold to conduct transactions per year |
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Term
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Definition
| how many times per year they want to use the dollar |
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Term
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Definition
| amount of time each dollar is held (in terms of percent of a year) before it is transacted or spent |
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Term
| Velocity is roughly constant when... |
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Definition
| transaction technologies do not change much |
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Term
| Ld (with the d in Ld superscript) means... |
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Definition
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Term
| Equilibrium in the money market has.. |
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Definition
| money demand = money supply |
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Term
| Since (Ld)=M/P=Y/V at equilibrium in the money market, Ld must simplify to equal... |
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Definition
| (Ld)=kY, since 1/V is a consant |
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Term
| If velocity is constant, or k=1/V, then the elasticity of money demand with respect to income is... |
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Definition
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Term
| If velocity is constant, or k=1/V, then the elasticity of money demand with respect to interest is... |
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Definition
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Term
| Money supply, or Ms, will equal.. |
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Definition
| P*L(Y,i), or the price*elasticities of labor and nominal interest |
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Term
| What happens when Ms does not equal P*Ld (or Md), or money supply does not equal money demand? |
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Definition
| means another market is out of equilibrium |
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Term
| What happens in the classical view when Ms>P*Ld? |
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Definition
| if good market out of equilib., it means goods demand>goods supply, so good prices will be bid up. if non-monetary asset market out of equilib., non-monetary goods>supply, r down initially, but goes back up to original as goods market has prices go up |
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Term
| What happens when Ms>P*Ld in the Keynesian view? |
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Definition
| goods market out of equilib., it means goods demand>goods supply, so firms simply hire more people to meet this new demand without changing the real wage |
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Term
| In a broader sense, V is not constant, as depends on... |
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Definition
| transaction technologies, which are exogenous to monetary policy |
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Term
| V not constant means that a change in M must cause... |
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Definition
| a change in P, Y, or both (money velocity does not usually stay constant) |
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Term
| When is velocity being exogenous not a good assumption? |
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Definition
| hyperinflation - velocity up, money demand falls, stabilization, velocity down, money demand up |
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Term
| When have changes in velocity and money demand driven monetary policy? |
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Definition
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Term
| It is not a good assumption to assume velocity is exogenous (determined by transaction technologies) because... |
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Definition
| money has an asset aspect that velocity must take into account |
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Term
| There was a spike in currency growth in the US during |
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Definition
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Term
| In Hong Kong, money growth spikes at the beginning of the year because of... |
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Definition
| Chinese New Year (v up because people giving it so much, Md up because a lot of people getting it to give it) |
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Term
| After WW2 in Hungary, due to hyperinflation, money velocity went __ and money demand ___ |
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Definition
| v up (people trying to get rid of it) and money demand down |
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Term
| For banks, reserves + loans = |
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Definition
| deposits + capital (i think this is vault cash) |
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Term
| What is "asset transformation"? |
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Definition
| this is taking deposits to buy other assets, which is the point of the bank |
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Term
| What is the Diamond-Dybvig Model? |
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Definition
| Says that banks insure investors against random liquidity shocks, have liquid liabilities and still hold assets as part-illiquid |
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Term
| An impatient investor withdraws.. |
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Definition
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Term
| Under the Diamond-Dybvig Model, what does the bank do? |
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Definition
| Takes all investments from investors, knowing what the population will need as a whole, and invests accordingly (with the individual investors not knowing until they withdraw) |
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Term
| If a patient investor gets worried when other investors start withdrawing, what can be created? |
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Definition
| a bank run, where everyone withdraws their money early |
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Term
| If a bank run occurs, the bank will quickly become... |
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Definition
| insolvent (i.e., deposits>assets) |
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Term
| A bank run will occur if enough... |
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Definition
| individual investors expect a bank run |
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Term
| What are some ways banks/policymakers can quell bank run fears? |
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Definition
| suspend convertibility of deposits, reserve requirements, deposit insurance from the Fed |
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Term
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Definition
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Term
| High leverage means a bank is... |
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Definition
| under-capitalized, means new worth can fluctuate very easily with a change in asset value |
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Term
| Low leverage ratio means a bank is... |
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Definition
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Term
| Reasonable leverage ratio means a bank is... |
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Definition
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Term
| "Limited liability" allows owns of companies to.. |
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Definition
| walk away from negatively valued assets in bankruptcy, encourages entrepreneurship in economy |
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Term
| Leverage ratios in banks are usually... |
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Definition
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Term
| Highly leveraged firms (aka lots of deposits) are prone to.. |
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Definition
| excessive risk-taking because of so much opportunity cost of holding those deposits and not a lot of assets |
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