Macro Chpt. 14

Fiat Money

Money that is authorized by a central bank and that does not have to be exchanged for gold or some other commodity money Has no value except as money

M1 includes:

The coins in your pocket The funds in your checking account The traveler's check that you have left over from a trip

By raising the discount rate, the Fed leads banks to make _______ loans to households and firms, which will _______ checking account deposits and the money supply

fewer, decrease

The U.S. dollar can best be described as

fiat money

Money

Any asset that people are generally willing to accept in exchange for goods and services

The use of money

Allows for greater specialization Reduces the transaction costs of exchange Eliminates the double coincidence of wanted

Double Coincidence of Wants

For a barter trade to take place between two people, each person must want the other one has

The most important tool the Fed uses to control the money supply

Conducts monetary policy principally through open market operations

INCREASE the money supply

Fed buys U.S. Treasury securities from the public

Why is money an imperfect standard of deferred payment?

Inflation causes the value of money to decrease over time

Money serves as a standard of deferred payment when

Payments agreed to today but made in the future are in terms of money.

Money serves as a unit of account when

Prices of goods and services are stated in terms of money.

Which of the following policy tools is the Fed LEAST likely to use in order to actively change the money supply?

Reserve Requirements

Which of the following conditions make a good suitable for use as a medium of exchange?

Should be of standardized quality, so that any 2 units are identical Should be acceptable to (that is, usable by) most buyers and sellers Should be durable, valuable relative to its weight, and divisible

Functions of money

Standard of deferred payment Unit of account Store of value Medium of exchange

When the Fed DECREASES the discount rate

The money supply will increase

M1

The narrowest definition of the money supply: The sum of currency in circulation, checking account deposits in banks, and holdings of traveler's checks

How does the quantity theory provide an explanation about the cause of inflation?

The quantity equation shows that if the money supply grows at a faster rate than real GDP, then there will be inflation

Hyperinflation

Very high rates of inflation

Governments sometimes allow hyperinflation to occur because

When governments want to spend more than they collect in taxes, central banks increase the money supply at a rate higher than GDP growth, often resulting in hyperinflation

How do the banks "create money"?

When there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands

Reserve requirements are changed infrequently because

banks set long-term policy decisions, loan decisions, and deposit decisions based on the reserve requirement

Commodity Money

has value independent of its use as money

When the Fed SELLS Treasury securities in the open market

the buyers of these securities pay for ten with checks and bank reserves fail

When the Fed PURCHASES Treasury securities in the open market

the sellers of such securities deposit the funds in their banks and bank reserves increase