Download ECON 2120 FINAL EXAM STUDY GUIDE and more Exams Social Sciences in PDF only on Docsity!
ECON 2120 FINAL EXAM STUDY GUIDE
Money - Answers - is any commodity (such as gold) or token ($10) that is generally accepted as means of payment Commodity or Token - Answers - money is something that can be recognized, and can be divided up into small parts. Means of Payment - Answers - is a method of settling a debt. You can buy a car with a loan and pay the loan in the due date. Money is used to pay off the loan. Money performs three vital functions - Answers - medium of exchange, unit of account, store of value Medium of exchange - Answers - is an object that is generally accepted in return for goods and services. Barter - Answers - without money, you would have to exchange goods and services directly for other goods and services and exchange. Unit of Account - Answers - Is an agreed-upon measure for stating the prices of goods and services. Fiat money - Answers - is objects that are money because the law decrees or orders them to be money. The objects that we use as money today are - Answers - currency; deposits at banks and other financial institutions Currency - Answers - The notes (dollar bills) and coins that we use in the United States today Deposits - Answers - are money because they can be converted into currency on demand and are used directly to make payments. Currency inside the banks is not money - Answers - when you get some cash from the ATM, you convert your bank deposit into currency. Official Measure of Money:M1 - Answers - consists of currency by individuals and businesses, traveler's checks, and checkable deposits owned by individuals and businesses.
Official Measure of Money:M2 - Answers - consists of M1 plus savings deposits and small time deposits, money market funds, and other deposits.consists of M1 plus savings deposits and small time deposits, money market funds, and other deposits. A money market fund - Answers - (also known as money market mutual fund) is an open-ended mutual fund that invests in short-term debt securities. An investment fund that holds the objective to earn interest for shareholders while maintaining a net asset value (NAV) of $1 per share. What is money market funds purpose? - Answers - is to provide investors with a safe place to invest easily accessible cash-equivalent assets characterized as a low-risk, low-return investment. Time deposit - Answers - A bank deposit that cannot be withdrawn before a date specified at the time of deposit. M1 - Answers - • Currency and traveler's checks
- Checkable deposits M2 - Answers - M Savings deposits Small time deposits Money market funds and other deposits Are M1 and M2 Means of Payment? - Answers - The test of whether something is money is whether it is generally accepted as a means of payment. M1 passes this test and is money. Some savings deposits in M2 are just as much a means of payment as the checkable deposits in M1. Checks - Answers - Not money. It is an instruction to a bank to make a payment Credit Cards - Answers - is not money becuse it does not make a payment Debit Cards - Answers - Not money. It is like an electronic check. Mobile Wallet - Answers - is an electronic version of a physical wallet. An Embryonic New Money: E-Cash - Answers - Electronic cash (or e-cash) is an electronic equivalent of paper notes (dollar bills) and coins. The banking system consists of - Answers - The Federal Reserve The banks and other institutions that accept deposits and that provide the services that enable people and businesses to make and receive payments.
Three types of thrift institutions are - Answers - savings and loan associations, savings banks, and credit unions. A savings and loan association (S&L) - Answers - is a financial institution that accepts checkable deposits and savings deposits and that makes personal, commercial, and home-purchase loans. A savings bank - Answers - is a financial institution that accepts savings deposits and makes mostly consumer and home-purchase loans. A credit union - Answers - is a financial institution owned by a social or economic group, such as a firm's employees, that accepts savings deposits and makes mostly consumer loans. (eg., Central Union of Turkish Agricultural Credit Cooperatives) Like commercial banks, thrift institutions - Answers - hold reserves and must meet minimum reserve ratios set by the Fed. Money Market Funds - Answers - is a financial institution that obtains funds by selling shares and uses these funds to buy assets such as U.S. Treasury bills. The Federal Reserve System (the Fed) - Answers - is the central bank of the United States Central bank - Answers - is a public authority that provides banking services to banks and regulates financial institutions and markets. The Fed's main task is to regulate the interest rate and quantity of money to achieve - Answers - low and predictable inflation and sustained economic growth. The key elements in the structure of the Federal Reserve are - Answers - The Chair of the Board of Governors The Board of Governors The Regional Federal Reserve Banks The Federal Open Market Committee The Chair of the Board of Governors - Answers - The Chair is the Fed's chief executive, public face, and center of power and responsibility. The current chair is Jerome Powell. The Board of Governors: - Answers - Consists of 7 members, appointed by the President of the United States and confirmed by the Senate. Each for a 14-year term. The President appoints one board member as Chair for a term of 4 years, which is renewable.
The Regional Federal Reserve Banks - Answers - There are 12 Federal Reserve banks, one for each of 12 Federal Reserve districts. Each Federal Reserve Bank has nine directors, three of whom are appointed by the Board of Governors and six of whom are elected by the commercial banks in the Federal Reserve district. The Federal Reserve Bank of New York implements some of the Fed's most important policy decisions. Federal Open Market Committee - Answers - is the Fed's main policy-making committee. The Chair and other six members of the Board of Governors. The president of the Federal Reserve Bank of New York. Four presidents of the other regional Federal Reserve banks (on a yearly rotating basis).The FOMC meets approximately every six weeks. The Fed uses four main policy tools: - Answers - 1. Required reserve ratios
- Discountrate
- Open market operations
- Extraordinary crisis measures Required Reserve Ratios - Answers - These reserves are •Currency in the institutions' vaults and ATMs •Deposits held with other banks or with the Fed Discount Rate - Answers - is the interest rate at which the Fed stands ready to lend reserves to commercial banks. Open Market Operations - Answers - is the purchase or sale of government securities— U.S. Treasury bills and bonds—by Federal Reserve in the open market. (NY Fed conducts these operations) Bond - Answers - is a promise to pay specified sums of money on specified dates; it is a debt for the issuer (borrower). Extraordinary Crisis Measures : Quantitative Easing - Answers - When the Fed creates bank reserves by conducting a large-scale open market purchase at a low or possibly zero federal funds rate, the action is called quantitative easing. Extraordinary Crisis Measures : Credit Easing - Answers - When the Fed buys private securities or makes loans to financial institutions to stimulate their lending, the action is called credit easing. Extraordinary Crisis Measures : Operation Twist - Answers - When the Fed buys long- term government securities and sells short-term government securities, the action is called operation twist.
When the Fed increases the discount rate, - Answers - the banks must pay a higher price for any reserves that they borrow from the Fed. Faced with a higher cost of reserves - Answers - the banks are less willing to borrow reserves. So when the discount rate increases, - Answers - the quantity of money decreases When the Fed decreases the discount rate, - Answers - the banks pay a lower price for any reserves that they borrow from the Fed. Faced with a lower cost of reserves - Answers - the banks are willing to borrow more reserves and increase their lending. The quantity of deposits that banks can create is limited by three factors: - Answers - • The monetary base: (The sum of coins, Federal Reserve notes, and banks' reserves at the Fed)
- Desired reserves (Ratio of reserves to deposits that a bank wants to hold)
- Desired currency holding The Monetary Base - Answers - is the sum of Federal Reserve notes, coins, and banks' deposits at the Fed. The size of the monetary base limits the total quantity of money that the banking system can create because - Answers - 1. Banks have desired reserves.
- Households and firms have desired currency holdings. And both of these desired holdings of monetary base depend on the quantity of money. Desired reserve ratio - Answers - is the ratio of reserves to deposits that a bank wants to hold. This ratio exceeds the required reserve ratio by the amount that the bank determines to be prudent for its daily business. Desired Reserves - Answers - A bank's actual reserves consists of notes and coins in its vault and its deposit at the Fed. Excess Reserves - Answers - equal the bank's actual reserves minus desired reserves. actual reserves equal their required reserves. - Answers - notes and coins in its vault+deposit at the Fed. Desired Reserve Ratio= - Answers - Reserves/Deposits The required reserve ratio= - Answers - The Fed requires the banks and other financial institutions to hold a minimum percentage of deposits as reserves
Excess reserves= - Answers - the bank's actual reserves minus desired reserves Currency drain - Answers - This leakage of currency If banks' reserves increase, - Answers - they increase their lending, which increases the quantity of money. If banks' reserves decrease, - Answers - they decrease their lending, which decreases the quantity of money. The money multiplier - Answers - is the number by which a change in the monetary base is multiplied to find the resulting change in the quantity of money. Monetary base, MB - Answers - is the sum of reserves and currency, so MB = (R + C) × Deposits The quantity of money, M - Answers - is the sum of deposits and currency, soM = Deposits + Currency = (1 + C) × Deposits Change in the quantity of = - Answers - money Change in monetary X base Money multiplier Finance - Answers - is the borrowing &lending that moves funds from savers to spenders Money - Answers - is the object used to make payments Physical capital - Answers - is the tools, instruments, machines, buildings, and other constructions that have been produced in the past and that are used to produce goods and services. Financial capital - Answers - is the funds that firms use to buy and operate physical capital. Gross investment - Answers - is the total amount spent on new capital goods. Net investment - Answers - is the change in the quantity of capital—equals gross investment minus depreciation. Wealth - Answers - is the value of all the things that a person owns. Saving - Answers - is the amount of income that is not paid in taxes or spent on consumption goods and services; saving adds to wealth. Capital gains - Answers - Wealth also increases when the market value of assets rises-
Insurance companies - Answers - compensates in the event of accident, fire...or provide insurance that pays out if a firm cannot meet its bond obligations. Receive premium from customers, make payments for claims. Use funds received to buy bonds & stocks. Net worth - Answers - is the total market value of what it has lent minus the market value of what it has borrowed. If net worth is postive - Answers - the institution is solvent and can remain in business. If net worth is negative - Answers - the institution is insolvent and must stop trading. A firm is illiquid - Answers - if it has made long-term loans with borrowed funds and is faced with a sudden demand to repay more of what it has borrowed than its available cash. Financial assets - Answers - Stocks, bonds, and loans are collectively Market for loanable funds - Answers - is the aggregate of the markets for loans, bonds, and stocks. Loanable funds are used for - Answers - 1. Business investment2. Government budget deficit
- International investment or lending Loanable funds come from - Answers - 1. Private saving2. Government budget surplus
- International borrowing The quantity of loanable funds demanded - Answers - is the total quantity of funds demanded to finance investment, the government budget deficit, and international investment or lending during a given period. Investment depends on - Answers - 1. The real interest rate (determines the slope of the demand curve)
- Expected profit (shifts the demand curve) The real interest rate - Answers - is the opportunity cost of the funds used to finance the purchase of capital. Demand for loanable funds - Answers - is the relationship between the quantity of investment demanded and the real interest rate, other things remaining the same. . A rise in the real interest rate - Answers - decreases the quantity of loanable funds demanded.
A fall in the real interest rate - Answers - increases the quantity of loanable funds demanded. An increase in expected profit - Answers - increases investment and shifts the demand for loanable funds curve rightward to DLF1. A decrease in expected profit - Answers - decreases investment and shifts the demand for loanable funds curve leftward to DLF2. The quantity of loanable funds supplied - Answers - is the total funds available from private saving, the government budget surplus, and international borrowing during a given period. Saving is the main item and it depends on - Answers - 1. The real interest rate2. Disposable income3. Wealth4. Expected future income 5. Default risk Supply of loanable funds - Answers - is the relationship between the quantity of loanable funds supplied and the real interest rate when all other influences on lending plans remain the same. The real interest rate - Answers - is the opportunity cost of consumption expenditure. A rise in the real interest rate - Answers - increases the quantity of loanable funds supplied. A fall in the real interest - Answers - rate decreases the quantity of loanable funds supplied. The four main factors that influence saving and change the supply of loanable funds are
- Answers - 1. Disposable income - the income earned minus net taxes.
- Wealth3. Expected future income 4. Default risk The greater a household's disposable income - Answers - the greater is its saving. The greater a household's wealth (what it owns) - Answers - the less it will save. The higher a household's expected future income, - Answers - the smaller is its saving today. The greater the default risk (risk that loan will not be repaid), - Answers - the higher is the interest rate needed to induce a person to lend and the smaller is the supply of loanable funds Along the supply of loanable funds curve - Answers - all the influences on saving other than the real interest rate remain the same.
Benefit of Holding Money - Answers - is the ability to make payments. The more money you hold, the easier it is for you to make payments. The opportunity cost of holding money - Answers - is the interest forgone on an alternative asset. The opportunity cost of holding money is the nominal interest - Answers - because it is the sum of the real interest rate on an alternative asset plus the expected inflation rate, which is the rate at which money loses buying power. demand for money - Answers - is the relationship between the quantity of money demanded and the nominal interest rate, when all other influences on the amount of money that people want to hold remain the same. The lower the nominal interest rate - Answers - the opportunity cost of holding money— the greater is the quantity of money demanded. An increase in the nominal interest rate - Answers - decreases the quantity of real money demanded. A decrease in the nominal interest rate - Answers - increases the quantity of money demanded. Changes in the Demand for Money - Answers - A change in the nominal interest rate brings a change in the quantity of money demanded. A change in any other influence on money holdings changes (shifts) the demand for money. The three main influences are - Answers - 1. Thepricelevel2. RealGDP3. Financialtechnology
- The Price Level - Answers - 1. The Price Level An x percent rise in the price level brings an x percent increase in the quantity of money that people plan to hold because the number of dollars we need to make payments is proportional to the price level. (real money demand= M / P)
- Real GDP - Answers - The demand for money increases as real GDP increases because expenditures and incomes increase when real GDP increases. To make the increased expenditures&income payments, HHs & firms hold more money
- Financial Technology - Answers - Daily interest on checking deposits, automatic transfers between checking and savings accounts.. These enable people to earn interest on money and lower the OC of holding money and increased the demand for money.
Supply of money - Answers - is the relationship between the quantity of money supplied and the nominal interest rate. The Nominal Interest Rate - Answers - adjusts to make the quantity of money demanded equal the quantity of money supplied. Law of demand: - Answers - The lower the "price" of money, the greater is the quantity of money that people are willing to hold. The value of money - Answers - is the quantity of goods and services that a unit of money will buy. It is the inverse of the price level, P, which equals the GDP price index divided by 100. That is, - Answers - Value of money = 1/P. Money Market Equilibrium in the Long Run - Answers - All the influences on money holding except the price level are determined by real forces in the long run and are given. Quantity theory of money - Answers - is the proposition that when real GDP equals potential GDP, an increase in the quantity of money brings an equal percentage increase in the price level (other things remaining the same). Velocity of circulation - Answers - is the average number of times in a year that each dollar of money gets used to buy final goods and services (value measured by nominal GDP= real GDP x price level). Velocity of circulation= - Answers - (P x Y) / M= (1.25 x $8 trillion)/ $2 trillion= 5 Equation of exchange - Answers - is an equation that states that the quantity of money multiplied by the velocity of circulation equals the price level multiplied by real GDP.
- The velocity of circulation= - Answers - = V= (PxY)/ M quantity of money= - Answers - M The price level= - Answers - P Real GDP= - Answers - Y Then the equation of exchange is - Answers - M x V=PxY The equation of exchange, M × V = P × Y, implies that - Answers - P = M × V ÷ Y. Money growth + Velocity growth = - Answers - Inflation rate + Real GDP growth
