Economics- Test 2 (Aplia and book)

list most liquid to least liquid- a share in a publicly traded company, the funds in a money market account, a $5 bill, your house.

$5 bill, funds in a money market account, share of stock, house

How many federal reserve regional banks are there?

12

Suppose that the real interest rate is 4%, the inflation rate is 2%, and the tax rate is 25%. According to the Fisher Effect, what is the after- tax real interest rate?

2.5

How many members of the FED of governors?

7

type of unemployment- Beth is a real estate agent. House sales in her area have declined because the region has been going through a recession. She has no clients and is currently looking for a new full-time job.

Cyclical unemployment (the ups and downs of the economy)

type of unemployment- Teresa is a physician who has decided to relocate to California to be closer to her family. She is currently interviewing with several prestigious hospitals in the San Francisco Bay Area.

Frictional unemployment

There are 2 main measures of the money supply- what are they?

M1 & M2

What contributes to making the FED an independent policymaking body?

Members of the Board of Governors are appointed for 14-year terms

Will taxes be nominal or real?

Nominal- the government can make more money when it is this way

type of unemployment- Same recently lost his job as a taxi driver. Minimum- wage legislation keeps employers from adding more of the low-skill positions for which he qualifies, so he has been unable to find work.

Structural unemployment

federal funds rate-

The interest rate that banks charge one another for short-term loans

The FEDs role as "lender of last resort" applies to which financially troubles institution?

US banks that cannot borrow elsewhere

Are loans assets?

Yes, because the borrowers promise to pay the money back + interest

M2-

all of M1 + savings deposits + small time deposits (CD) + money market mutual funds + a few minor categories

Reserves-

any deposits that the bank holds that are not loaned out- reserves= demand deposits- loans

Assest-

anything of value owned by a person or firm

What is money?

assets that people regularly use to buy goods and services; not income and not wealth

Suppose the FED wants to increase the money supply by $200. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. The reserve requirement is 10%, the FED will use open market operations to _________ (buy/sell) _______) ($) worth of US government bonds.

buy; $20.00

What kind of loans do banks make?

consumer loans and commercial loans

M1-

currency + demand deposits + travelers checks + other checkable deposits

What are the types of money?

currency, checks, checking account deposits, debit cards

Suppose the world price of steel fall substantially. The demand for labor among tell-producing firms in Pennsylvania will _________. The demand for labor among automobile-producing firms in Michigan, for which steel is an input, will _______. the temporary unemployment resulting from such sectoral shifts in the economy is best described as _______ unemployment.

decrease; increase; frictional

What is the banks largest liability?

deposits (checking account, savings account, CD)- owed to households and firms

If money is neutral and the money supply rises, which of the following will rise?

dollar wages

Barter- What are the problems of bartering?

exchange goods for goods; every trade would require a 'double coincidence of want' (both parties want the other item)- when this happened commodity money was introduced

Income-

flow of earning per unit of time (ex- $50,000 a year)

In order to increase or decrease dollars in the US economy, what will the FED do?

increase- buy government bonds/ notes decrease- sell government bonds/ notes

According to the quantity theory the primary cause of _______ is growth in the ________

inflation; money supply

medium of exchange, unit of account, store of value- Larry writes a check for $3,000.

medium of exchange (providing an accepted method of payment for goods and services)

What are the functions of money in the economy?

medium of exchange, unit of account, store of value, standard of deffered payment

commodity money-

money taking the form of a commodity with intrinsic value; value outside of its use as money

fiat money-

money whose value derives from government decree

If the government wants to reduce frictional unemployment, what policies would help achieve this goal?

offering recipients of unemployment a benefit of cash bonus if they find a new job (incentive).

Frictional unemployment-

often results from changes in the demand for labor among firms

What is the FEDs primary tool for changing the money supply?

open market operation

What is the FEDs primary tool for changing the money supply?

open market operation (changing inflation rate and required reserves)

Inflation- induced tax distortions-

raises taxes paid by investors and raises the cost of capital for business investment because investors are taxed on the nominal payments they receive rather than on the real payments.

excess reserves-

reserves that a bank holds above and beyond the required reserves excess reserves= reserves - required reserves

In order to decrease the number of dollars in the US economy (money supply), the FED will ______ government bonds

sell

medium of exchange, unit of account, store of value- Larry has $1,537 in his checking account.

store of value (providing means of transferring purchasing power from the present to the future)

What is a T-account?

stripped-down version of a balance sheet that shows how a transaction changes a bank's balance sheet

open market operations-

the FEDs primary tool for controlling the money supply; involve buying and selling US government bonds.

Menu costs-

the costs to firms of changing prices (small at low levels of inflation and large at high levels of inflation)

liquidity-

the ease and speed with which an asset can be converted into a medium of exchange (people carry cash because it is easier)

discount rate-

the interest rate on loans that the FED makes to banks.

Required reserves-

the portion of its demand deposits that the banks needs to hold in reserves; depends on legal reserve requirements required reserves= demand deposits * required reserve ratio

Shoe leather costs-

the resources wasted when inflation encourages people to reduce their money holdings- carry minimum amounts of money- going to the bank more often

Wealth-

total collection of pieces of property that serve to store value (value of assets - value of debt)

medium of exchange, unit of account, store of value- Larry can easily determine that the price of the computer is more than the price of the vacation.

unit of account (providing buyers and sellers a common reference point for valuing goods and services)