Econ money- Learnsmart

In 1960, M1 ____ of M2; today M1 is ____ M2

47%, 25%

Interest

A Fee for the use of money over time; the payment made to agents that lend or save money

$750 interest payment bond price: $5,000 $15,000 $37,00

Bond yield $750/5,000X100=15% 750/15000X100=5% 750/37000X100=2%

The ___equation is an equation relating the nominal interest rate to the real interest rate and the expected inflation rate.

Fisher

During the 1990s, after the fall of the Soviet Union, Russian factories sometimes resorted to paying their workers in:

Glassware or pantyhose.

The reserve requirement is the _____ percentage of deposits that banks must keep on hand as reserves.

Minimum

Asset demand

The demand for money to be saved for future use. downward slop on a graph. how much people want to hold at various interest rates, for future use. the interest rate is the opportunity cost of holding money, because the alternative to holding money is to hold a financial asset like a bond that pays interest. At higher interest rates, bonds become more profitable. As the interest rate increases,people demand a lower quantity of money and, instead, hold more bonds and other interest-earning assets. As the interest rate falls, the quantity of money demanded increases. the graph is downward sloping.

Transaction demand

The demand for money to be used in daily transactions

Yield

The effective interest rate earned on a bond or another asset; equal to the net profit earned divided by the amount invested.

The nominal interest rate includes two components:

The expected rate of inflation. The real interest rate.

Nominal interest rate

The interest rate or cost of borrowing money, expressed in percentage terms; usually, the interest rate stated on a loan or other asset.

Real interest rate

The interest rate paid to lenders and savers when the expected rate of inflation equals zero; the inflation adjusted return, equal to the nominal interest rate minus the inflation rate.

Coupon Rate

The interest rate stated on a bond, as a percentage of the bond's face value.

M1

The most liquid measure of the money supply; includes demand deposit, travelers check, currency, and other checkable deposits.

Face value

The nominal, or dollar, value of a security, generally printed on the face (front) of the security. For bonds, it is the amount paid to the bondholder when the bond is repaid in full.

The money multiplier equals:

The overall change in the money supply/ the initial change in reserves.

Expected inflation

The rate of inflation, expressed as a percentage anticipated by market participants.

Demand for bonds

The relationship between the interest rate and the quantity of bonds demanded in an economy, all elese held constant.

Supply of bonds

The relationship between the interest rate and the quantity of bonds supplied in an economy, all else held constant.

Money demand

The relationship between the interest rate and the quantity of money demanded, all else held consistant; the sum of the transaction demand and asset demand for money.

Bond

The relationship between the interest rate and the quantity of money supplied in an economy; usually a given value. In the US the money supply is equal to M2.

Money Supply

The relationship between the interest rate and the quantity of the money supplied in an economy; usually a given value. In the US the money supply is equal to M2.

The money heads out of recession. Wages and income rise. The money ____ will ___ shifting to the ____. At the initial interest rate, a ____ of money occurs, causing the equilibrium interest rate to ___ to a new equilibrium level.

demand, increase, right, shortage, rise.

Societies generally abandon older forms of money when they:

develop new and better monies

to find the money multiplier

divide 1 by the reserve requirement in each country.

Because the asset demand for money is sensitive to the prevailing interest rate it is a ____line

down sloping

Total money demand is:

downsloping as a result of asset demanded

In a world with no inflation, the nominal interest rate _____ the real interest rate.

equals

Total reserves equal______ reserves plus ______ required reserves.

excess. required.

During the 1980's inflation _____ faster than the nominal interest rate, meaning real interest rates were ___

fell, positive

a surplus is a situation in which the quantity supplied is ____ than the quantity demanded at the current market price.

greater

If the money supply increases people will buy additional assets with:

higher returns and greater risk

Transaction demand depends on:

how much output people buy. How expensive output is.

Transaction demand depends on how much output people buy, which is based on their ____; and how expensive output is, which is based on the ___ level

income. price.

We graph the supply of money with the interest rate on the ____ axis and the quantity of money on the ____ axis.

Vertical. Horizontal

The money supply is a vertical line because it is

independent of the interest rate

Banks play a crucial role in determining_____rates and the _____supply.

interest , money

The yield on a bond is:

interest payment/bond cost

Knowing how much money an economy has matters because it helps determine:

interest rates and prices

Because you forgo ____ earnings when you hold money, the ____ rate is the _____ cost, or ____ of money

interest, interest, opportunity, price

The interest rate used to determine the coupon payment.

is fixed

The interest rate:

is the price of money

A real interest rate is _____ whenever the inflation rate exceeds the nominal interest rate that was set on a loan.

negative

The interest rate stated on a loan or other asset is the ___ interest rate

nominal

The cost of keeping more reserves than the fraction required, instead of lending these funds out, is the ------ cost of the forgone interest the funds would have earned.

opportunity

_____loans are a modern-day application of usury laws, which limit the interest rate than can be charged on a loan.

payday

When an individual deposits a check at the local bank, the bank's____ increase. The bank can use most of those _____ to make loans, increasing the _____ of the economy.

reserves. reserves. supply

The demand for money comes from two sources. The demand for money to be:

saved for future use. Used in daily transactions.

M2 has grown faster than M1 because of the growth of

small-denomination time deposits and money market funds.

The ____ of money in an economy is largely determined by a central monetary authority.

supply

The___ of money is equal to a fixed quantity

supply

The federal reserve decides to cut the money supply. The money ____ will ___ shifting to the ____. At the initial interest rate, a ______ of money occurs, causing the equilibrium interest rate to ______ to a new equilibrium level. This federal Reserve action ________ bonds, causing the price of bonds to _____. This will result in _____bonds yields.

supply, decrease, left, shortage, rise, When the FED cuts the money supply the demand for bonds falls, decrease, higher

M2

A broader measure of the money supply that includes M1 plus savings deposits, small-denomination time deposits, and money market mutual funds.

Travelers Check

A certification, or check, that can be converted to currency.

Money Market Mutual Fund

A demand deposit that accepts deposits and purchases short-term bonds and commercial debt in order to pay interest on the deposited funds.

In many professional sports leagues, one team is not allowed simply to purchase a player from another team, so they have to trade which requires:

A double coincidence of wants

Bond Market

A financial market in which participants can buy and sell new bonds (primary market) or trade bonds already in circulation (secondary market).

Money Supply Curve

A graphical representation of the relationship between the quantity of money supplied in an economy and the interest rate. Generally, the money supply curve is a vertical line representing a given money supply.

Money Market

A market in which the demand for and supply of money determine an interest rate, or opportunity cast of holding money balances.

Fisher equation

An equation relating the nominal interest rate to the real interest rate and the expected inflation rate.

In economics, the word "money" means:

Any item that both buyers and sellers will generally accept in exchange for goods and services.

Money

Any item that both buyers and sellers will generally accept in exchange for goods and services.

Medium of exchange

Any item used to facilitate trade between buyers and sellers; one of the functions of money.

The money you have in your checking account is described as:

Demand deposits checking account balances Checkable deposits

During the Great Depression:

Depositors took their funds out of their bank accounts. Banks failures became commonplace throughout the country.

____reserves are equal to total reserves minus required reserves.

Excess

Excess Reserves Formula:

Excess Reserves= total revenue - required reserves

The federal reserve is commonly called the _______

FED

The supply of money in an economy is largely determined by the ___

Fed

The first time money represented value instead of being intrinsically valuable, like a gold coin was:

In the Chinese Song Dynasty during the 11th century.

The interest rate:

Is the price of money.

Suppose Rogers First Bank has $25,000 in deposits. Customer deposits are considered liability by banks. The reserve requirement (rr) is 20%. Now, suppose Janice makes a large withdraw of $1,000. Because Janice walks out of the bank with cash, the bank's deposits and reserves both fall by $1,000.

Janice removed $1,000 from her checking account. Therefore, total deposits in the bank fall from $25,000 to 24,000. The formula for the required reserves tells us that Rogers First Bank must keep $24,000x0.20=$4,800 as required reserves.But since Janice is walking out of the bank with $1,000 in cash, Rogers First Bank's total reserves have also fallen by $1,000. Giving the bank $2,500-$1,000=$1500 left in total reserves. Excess reserves are now: Total reserves-required reserves= 1500-1000=$500.

Deposits that automatically transfer money balances from savings account to checking accounts are part of____-.

M1

A change in any one of the components of ___ will directly affect the money supply.

M2

Knowing how much __________ an economy has matters because it helps determine interest rates and prices.

Money

Demand deposits

Money held in an account that can be converted to currency on demand often called checkable deposits on checking account.

Time deposit

Money held in an account that cannot be converted to currency, with out penalty, before a specific time.

A deposit account that accepts deposits and purchases bonds and commercial debt that pay interest is a:

Money market mutual funds

Silver Is this a medium of exchange Is this a unit of account Is this a store of value Is this money

No No Yes No

Model cars Is this a medium of exchange Is this a unit of account Is this a store of value Is this money

No to all

The Mona Lisa Is this a medium of exchange Is this a unit of account Is this a store of value Is this money

No to all but a store of value

The interest rate is the _____cost of holding money, because the alternative to holding money is the hold a financial asset like a bond that pays interest.

Oppertunity

The money multiplier will equal 1/rr so long as:

People cant hold any loaned money as cash. Banks loan our all of their excess reserves.

Currency

Physical units of money, such as cash and coins

Required Reserves Formula:

Required reserves=deposits reserves X Requirement (rr).

A reserve_________specifies the fraction of checkable deposits that a bank must keep on hand.

Requirement

To make sure banks meet the daily needs of customers, the Federal Reserve enforces a:

Reserve requirement

To make sure banks meet the daily needs of customers, the federal reserves enforces a:

Reserve requirement

Suppose Rogers First Bank has $25,000 in deposits. Customer deposits are considered a liability by banks. The reserve requirement (rr) is 20%.

Rogers First Bank reserves are $5,000

At each of the money-creation process, banks must hold on to some portion of the increase in reserves and can lend out the rest. Every time this lending cycle occurs, the increase in loans becomes_____

Smaller

A _____ is a situation in which the quantity supplied is greater than the quantity demanded at the current market price.

Surplus

Liquidity

The degree to which an asset can be readily converted into currency

Demand for Money

The sum of the transaction demand and asset demand for money.

During the great depression:

The total number of banks decreased from 25,330 in 1929 to 14624 in 1933. Many people wanted to hold their currency instead of depositing it in a bank. Total deposits decreased from almost 60 billion in 1930 in 1930 to 41.5 billion in 1933. The money supply shrank by 24% despite an increase in actual currency.

When people deposit money, the bank provides valuable services in return:

Their money is available when needed, it's safe, and it might even earn interest.

The money you have in your savings account

This is in

Your available credit on your home equity line of credit

This is in neither M1 nor M2

The six-month certificate of deposit (CD) you bought in June that will mature in time to pay your December rent

This is only in M2

___reserves are the total amount of reserves that a bank has, some of which it is required to keep on hand.

Total.

The federal reserve, commonly called the FED:

Tracks the money supply

________checks can be immediately exchanged for currency

Travelers

The determinants of money demanded include:

Uncertainty about the future changes in real GDP changes in the price level

Postage stamps in prisons Is this a medium of exchange Is this a unit of account Is this a store of value Is this money

Yes to all

When you pay with a credit card:

You pay for the item when you pay your credit card bill with funds from your checking account. The bank that issued the credit card pays the merchant for the goods you bought.

Store of Value; definition in context

a characteristic of certain assets that enable them to transfer wealth from the present into the future; one of the functions of money.

Shortage

a situation in which the quantity supplied at the current market price. Also called excess demand.

Surplus

a situation in which the quantity supplied is greater than the quantity demanded at the current market price. Also called excess supply

the __ demand for money is sensitive to the prevailing interest rate.

asset

We construct the total demand for money by adding _____ and ______ demands at each interest rate.

asset. transaction

A ______ is a financial agreement that obligates a borrower (such as an individual, firm, or government) to repay the amount borrowed (principal) and interest on a specific date in the future.

bond

A change in interest rate will:

cause a movement along the money demand curve

A rally in the stock market causes people to want less of their assets as cash and more in stocks and bonds. The money _____ will ______ shifting to the _____. At the initial interest rate, a _____ of money occurs, causing the equilibrium interest rate to ____to a new equilibrium level. This stock market rally _____ bonds, causing the price of bonds to ____. This will result in ____ bond yields.

demand, decrease, left, surplus, fall, Increase the demand for, increase, lower.

If a bond sells for more than the face value, it sells at a ____

premium

If a bond sells for more than the face value, it sells at a ____.

premium

The money market is similar to all other markets in this respect, but slightly different in that the ___ of money is the interest rate.

price.

Bond ___ and bond ___ always move in opposite directions.

prices yields

Transaction money demand is:

related to the level of nominal GDP, Independent of the interest rate.

When there is a recession, there is a decrease in nominal GDP and the ______ demand for money falls

transaction

The economy heads out of a recession. Banks gain confidence in the credit worthiness of their customers, so they increase the amount of loans they make. The money ____ will ____ shifting to the ___. At the initial interest rate, a _____ of money occurs, causing the equilibrium interest rate to _____ to a new equilibrium level. This event ___ bonds, causing the price of bonds to ___. this will result in ____bonds yields.

supply, increase, right, surplus, fall, decrease the supply of, increase, lower.

Transaction demand

tells us how much money people want in order to make transactions (to buy goods). Transaction demand depends on how much output people buy (which is based on their income) and how expensive output is (which is based on price level) Transaction demand does not depend on interest rates. So, if we drew a transaction demand curve for money, it would be a vertical line.

When a company borrows money by selling a bond, it specifies the terms of the bond:

the dollar amount that will be returned when the bonds term expires. the amount of interest the bond will pay in each period. its length.

Interest rate

the payment made to agents that lend or save money, expressed as an annualized percentage of the monetary amount lend or saved. Sometimes called nominal interest rate or price of money

Exchange, unit of account, and store of value

using money in our economy makes it easier for people to make transactions with each other. Money is a median of exchange people do not have to try to in someone who wants what they have and who has what they want. Money is a unit of account; the value of goods and services is expressed in monetary units (dollars) making it easy to compare prices of two different items. Money is a store of value. When a farmer sells his entire crop in one month, he can use the money he reserves in exchange many month slater to buy goods his family wants or needs.

Suppose the transaction demanded for money is $8 billion, graphically, the transaction demand for money is;

vertical line-the same $8 billion is demanded at all interest rates.

A U.S. $20 bill: Is this a medium of exchange Is this a store of value Is this money

yes to all