Economics, "Money and Banking," Chapter 11 – Flashcards
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Money
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Any good that is widely accepted for purposes of exchange and in the repayment of debt.
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Name the three major functions of money.
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1.) Medium of Exchange 2.) Unit of Account 3.) Store of Value
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What if money didn't exist?
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Goods would have to be exchanged or bartered.
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Barter
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Exchanging goods and services for other goods and services without the use of money.
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What is an advantage of using money as a medium of exchange?
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Removes the complications of: 1.Locating a person that is interested in trading.
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What does money reduce?
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Transaction Costs.
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Unit of Account
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A function of money, anything that is generally accecptable in exchange for goods and services.
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How is the value of a good in a barter economy expressed?
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It is expressed in terms of other goods.
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Name a disadvantage of the barter economy.
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There is no common unit of measurement.
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How does money make determining the relative prices easy and quick?
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There is a common value and relative price of a good in terms of other goods isn't needed.
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Store of Value
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A function of money, the ability of an item to hold value over time.
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When does money not hold its value well?
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During high-inflationary periods.
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What does money allow us to do?
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To keep moeny until we decide how we want to spend it.
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In comparison to a money economy, how long do exchanges take in a barter economy?
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Longer.
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Why do exchanges take longer in a barter economy?
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Transaction Costs are higher.
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Double Coincidence of Wants
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In a barter economy, a requirement that must be met before a trade can be made. It specifies that a trader must find another trader who is willing to trade what the first trader wants and at the same time wants what the first trader has.
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What is a necessary condition for an exchange to occur in a barter economy?
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Double Coincidence of Wants.
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A greater acceptability
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Increases the chances of a good being accepted.
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Why is a good accepted when it has a greater ability to be accepted?
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It can easily be traded for most goods at another time.
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Explain the snowball effect.
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As more people come to realize that a good has a greater acceptability, the good that is accepted most of the time becomes more acceptable.
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What explains how money has evolved.
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The snowball effect of a greater ability.
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Role of Self-Interest
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Led to people deciding to accept the most marketable or acceptable good.
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Why do exchanges in a money economy take less time?
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Double Coincidence of Wants is unnecessary.
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What happens with the extra time that is left over from not making exchanges?
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Goes to: 1.) Leisure 2.) Work 3.)Both
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How is output increased?
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By freeing up more time.
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How is a money economy likely to be richer than a barter economy?
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More output.
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The Standard of Living is dependent on:
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1.) Number and quality of goods consumed. 2,) Amount of Leisure consumed. 3.)
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How is the standard of living affected by a money economy?
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It's increased.
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A Money Economy allows...
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A person to specialize
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In a Barter Economy, specializing is..
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Extremely costly.
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Does money have to be backed up by a commodity?
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No, in our economy, money has value due to its general acceptability.
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M1
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Currency held outside banks plus checkable deposits plus traveler's checks.
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What is M1 referred to?
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The narrow definition of the money supply or as transactions money.
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What is M1?
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Money that can be directly used for everyday transactions.
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Currency
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Coins and paper money.
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Federal Reserve Notes
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Paper money issued by the Fed.
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Checkable Deposits.
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Deposits on which checks can be written.
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What constitutes 99% of the paper money in circulation?
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Federal Reserve Notes.
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Who issues federal reserve notes?
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Federal Reserve District Banks.
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Name the different types of checkable deposits.
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1.) Demand Deposits. 2.)NOW( negotiated order of withdrawal) 3.)ATS (automatic transfer from savings)
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Demand Deposits
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Checking accounts that pay no interest.
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Do ATS accounts pay interest?
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Yes
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What is M2 referred to?
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A broad definition of money supply.
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M2
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M1 plus savings deposits ( including money market deposit accounts) plus small-denomination time deposits (retail) money market mutual funds.
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Money Market Deposit Account
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An interest-earning account at a commercial bank or thrift institution. Usually, a minimum is required for an MMDA, andmostoffer limited check-writing privileges.
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Savings Deposit
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An interest-earned account at a commercial bank or thrift institution. Normally, checks cannot be written on savings deposits, and the funds in a savings deposit can be withdrawn (at any time) without a penalty payment.
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Thrift Institution
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Includes: -Savings and Loan Associations -Mutual Saving Banks -Credit Unions
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Small-denomination time deposits
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Time deposits that are less than 100,000
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institutional MMMFs
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MMMFs held by large institutions
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retail MMMFs
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MMMFs held by individuals (or all others)
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Are all MMMFs part of M2?
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No, only retail MMMFs.
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What is credit card referred to?
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Plastic Money.
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Credit Card
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An instrument or document that makes it easier for the holder to obtain a loan.
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What occurs when a person uses a credit card?
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He/she uses someone else's money.
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Gold Smiths
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The first bankers
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Why did people turn to goldsmiths?
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1.)Money was inconvenient for customers to carry. 2.)Gold is heavy 3.)Theft/Robbery
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How did goldsmiths acknowledge that they held deposited gold?
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They issued receipts (warehouse).
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What led to people using receipts as payments?
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Trust.
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How did warehouse receipts become money?
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Once they became widely accepted for purposes of exchange.
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The preference of warehouse receipts to gold led to....
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Amt. of gold represented by receipts was greater than actual amount of gold on deposit.
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Application ofFractional Reserve Banking...
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Used in modern times.
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What is the federal reserve bank known as...
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The Fed or the bank's bank.
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How is the federal reserve bank essential to a bank's reserve?
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Banks have an account with the federal reserve
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What is the chief function of the fed?
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To control the nation's money supply.
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Reserve Account
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Bank deposits at the Fed.
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Vault Cash
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Currency or cash held in a bank's vaults. ( premises)
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Reserves=
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Bank Deposits at the Fed+ Vault Cash
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What is the mandate of the Fed?
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Commercial banks must hold a certain fraction of their checkable deposits in reserve form.
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Reserve Form
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Form of bank deposits at the Fed and/ or vault cash
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Required Reserves=
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r x Checkable Deposits
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What is the incentive of having excess reserves?
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Bank can earn interest.
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Are banks allowed to print their own money?
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They are prohibited.
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How can banks create money?
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Increase checkable deposits.
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What occurs when a bank makes a loan?
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A bank opens an account for the maker, but it doesn't hand out cash.
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By making a loan, a bank...
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increases the money supply without decreasing someone else's money and the maker has more than before.
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When a purchase is made by a maker, what happens?
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Money supply doesn't change. dollars have moved to the account of the retailer.
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Formula for: Maximum change in checkable deposits
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1/r x change in R
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Why maximum?
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No cash leakages and zero excess reserves
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What occurs when there's a cash leakage?
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Reduces flow of dollars. Less money is created.
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What occurs when a bank doesn't lend all of its excess reserve?
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Money supply will increase by less and checkable deposits.
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The money expansion process requires:
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1.) the Fed 2.) Banking system
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Maximum change in checkable deposits:
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1/r x change in ER
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So how is money destructed?
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The money is destroyed by the Fed.
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What are the immediate corrective measures?
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Reduce outstanding loans.
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Composition not size
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decreased money outside goes to checkable deposits.
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Economists argue that the money economy has reduced.....
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dead-time consuming goods or services.
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What occurs when I deposit money in the bank?
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I change the composition of they money supply.
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How does a bank create a multiple of a nominal cash deposit?
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It creates a number of checkable deposits.
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What occurs when a credit card is used?
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A liability is incurred for the user.
