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50 Cards in this Set
- Front
- Back
money
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anything that is generally accepted as a medium of exchange
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bartering
problem: double coincedence of wants |
direct excahnge of goods and services for other goods and services
you must find someone that wants what you want but also has what you have |
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role of money: medium of exchange
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what seller generally accept and buyers generally use to pay for goods and services
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role of money: store of value
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asset that can be used to transport purchasing power from one time period to another
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role of money: unit of account
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a standard unit that provides a consistent way of qouting prices
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liquidity property of money
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property of money that maeks it a good medium of exchange as well as a store of value: it is portable and radily accepted and thus easily exhanged for goods
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commodity monies
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items used as money that also have intrinsic value in some other use
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fiat, or token money
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items designated as money that are instrinsically worthless
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legal tender
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money that a government has required to be accepted in settlment of debts
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currency debasement
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the decrease in the value of money that occurs when its supply is increased rapidly
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M1 or transactions money
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money that can be directly used for transactions
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M2 or broad money
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m1 plus savings accounts, money market accounts, and other near monies
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near monies
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close substitutes for transactions money such as savings accounts and money market accounts
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financial intermediaries
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banks and other financial institutions that act as a link between those who have money to lend and those who want to borrow money
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run on a bank
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occurs when many of those who have claims on a bank (deposits) present them at the same time
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federal reserve bank (the fed)
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central bank of the united states
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reserves
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the deposits that a bank has at the federal reserve bank plus its cash on hand
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required reserve ratio
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the percentage of its total deposits that a bank must keep as reserves at the federal reserve
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excess reserves
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the difference between a banks actual reserves and its requires reserves
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money multiplier
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1/RRR
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functions of fed: clearing interbank payments
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allows banks to shift money around virtually instantaneously
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function of fed: regulate bank system
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federal desposit insurance corporation- insures most deposits up to 100,000
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function of fed: lenger of last resort
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one of the functions of the fed: it provides funds to troubled banks that cannount find any other sources of funds
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tools for changing money supply: change RRR
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increase or decrease the amount of money circulating
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tools for changing money supply: changing discount rate
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interest rate fed charges to borrow money
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tools for changing money supply: engange in open market operations
can the tresury print money to finance a defecit |
buy and sell US government securities
no |
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moral suasion
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the pressure that in the past the fed exerted on member banks to discourage them from borrowing heavily from the fed
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monetary policy
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the behavior of the federal reserve concerning the money supply
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interest
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the fee that borrowers pay to lenders for the use of their funds
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interest rate
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the annual interst payment on a loan expressed as a percentage of the loan. equal to the amount of the interest recieved per year divided by the amount of the loan
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transaction motive
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the main reason that people hold money- to buy things
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nonsynchonization of income and spending
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the mismatch between the timing of money inflow to the household and the timing of money outflow for household expenses
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optimal balance
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level of average money balances that earn most profit, taking into account both interst earned on bonds and costs paid for switching from bonds to money
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speculation motive
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one reason for holding bonds instead of money: because the market value of interst bearing bonds is inversely related to the interest rate, investory may wish to hold bonds when interest rate are high with the hope of selling them when interest rates fall
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detrimants of money demand
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interest rate (inverse relationship)
dollar volume of transactions (positie relationship) |
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excess supply of money
excess demand of money |
left of graph (falling rates)
right of graph (rising rates) |
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tight monetary policy
easy monetary policy |
fed policies that contract the money supply in an effort to retrain the economy
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goods market
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market in which goods and services are exchanged and in which the equilibrium level of aggregate output is determined
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money market
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market in which financial instruments are exchanged and in which the equilibrium level of interest rate is determined
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relationship between income and the demand for money
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as income rises, demand for money rises
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relationship between interest rate and planned investment
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inverse relationship
as rates rise, investment falls as rates fall, investment rises |
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expansionary fiscal policy
expansionary monetary policy |
an increase in government spending or a reduction in net taxes aimed at increasing aggregate output (income) (y)
in increase in the money supply aimed at incrreasing aggregate output (income) (y) |
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crowding out effect
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the tendency for increases in government spending to cause reductions in private investment spending
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interest sensitivity or insensitivity of planned investment
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thre responsiveness of planned investment spending to change in the interest rate. interest sensitivity means that planned investment spending changed a great deal in reponse to changes in the interest rate. interst insensitivity means little or no change in planned investment as a reult of changed in the interest rate
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effects of expansionary fiscal policy
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y increases less than if r did not increase (y and r)
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effects of expansionary monetary policy
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r decrease less than if Md did not increase (r and Md)
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effects of contractionary fiscal policy
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y decreases less than if r did not decrease
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effects of contractionary monetary policy
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r increases less than if M d did not decrease
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IS-LM diagram
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illustrates negative relationship between equilibrium value of aggreagate output (income)(y) and the interest rate in the goods market
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IS Curve
LM curve |
neg relationship between r and y
pos relationship between r and y |