Economic Test 5
Who creates money? How?
- FDA only creates money by interacting with banks - *banks create money when they lend excess reserves*
What happens with more capital goods (or investment)
- More production - Higher GDP
How do banks earn a profit?
- They invest peoples money -They pay people interest then do other stuff with it to make money - *invest money by -lending- it to people who want to buy stuff and the bank always charges an interest rate* - Seek profit opportunities by investing their excess reserves
Accounts on which you can write a check or (debt account) are *available* to buy stuff *do transaction*
Checkable deposits
Size of M1 in U.S. about 3.4 trillion with currency +
Checkable deposits
Borrowing and lending
Credit
- Market for loanable funds - Choices that we make between consumption of things now and later
Credit Markets
You have a line of credit, a preotherized loan. Bank pays the person because the bank will charge you interest
Credit cards (not money)
What makes up our supply of money? That is, what counts as money in our society?
Currancy, Checkable deposits - currency component of the money supply or anything money is that it is in fact accepted and used by people as a medium of exchange - Transaction money
Putting money in a bank and you can go get it whenever you want - Something the bank is holding for me - Earning interest?
Deposits
In battering both people want what the other has
Double coincidence of wants
The nominal rate - the rate of inflation
Real Rate
Takeaway from time preference
How interest rates change
Why is money general acceptable? - Everyone will accept money
The value we place on money is less subjective of what we place on other things
Why do some people want to return to a monetary gold standard?
They do not trust the government to run the monetary system
- You can't have hyper exflation? - Fiat system - *would restrict government to expand and contract the money supply* - Monetary system that is backed by something(gold) when government wants to print money need to have enough gold to back it up
Why do some people want a return to a monetary gold standard?
Entrepreneurs tend to make errors . . .
all the time, some being pleasant surprises and others being unpleasant surprises.
Money ceased to function medium of exchange. When money ceases to do what it's supposed to do
Hyper inflation
In a checking account you don't get
Interest
How does money reduce transactions costs?
It's something everyone is willing to accept
FDA gives bank new reserves to
Lend out
Obligation you have to someone else the person can come to claim whenever they want
Liability - Example, deposits
- More saving - Lower interest rate - More capital information - More production of future consumption - Goods tomorrow rather than today
Low rate of time preference
We place a greater value on consumption tomorrow rather than today - Consume less save more
Low rate time preference
Currency + checkable deposits
M1
Measure of how much transaction is available?
M1
Different way to measure money in economy - Mutual funds, saving deposits, ect. - Includes M1 + vary liquids (almost money, near money)
M2
M1 + saving deposits, money market accounts
M2
Which of the following statements is true about M1 and M2?
M2 is always larger than M1.
Is a productive resource (productive asset)
Money
Help people save and borrow
Banks
Is the actual quoted rate of interest spelled out in the loan, the rate that you see posted on the wall behind the bank tellers
Nominal Interest Rate
Policy buying and selling governments bonds with saving? - When federal reserves *buys and sells bonds* and increases or decreases banks . . .
Open market operations
When a government spends more on goods and services than it collects in tax revenue, it has a . . .
budget deficit
The Federal Reserve engages in open market operations when it . . .
buys and sells U.S. government bonds.
Which of the following are NOT in the M1 measure of money?
credit cards
A gold standard is a system in which . . .
currency can be exchanged for a given amount of gold.
The supply of credit in our economy is comprised of . . .
household savings channeled through banks.
Banks create money primarily by . . .
lending out their excess reserves.
Credit markets are markets in which there is a demand and supply of . . .
monetary loans.
The United States has most recently had . . .
mostly federal budget deficits.
A recession is a market correction because during a recession . . .
productive resources get moved to places where they are valued more.
Money helps economic activity by . . .
reducing transactions costs
In the macroeconomy, interest rates coordinate . . .
saving and investment.
Fiscal policy seeks to end a recession through the use of . . .
the federal budget.
The Federal Reserve System is . . .
the independent central bank of the United States.
A person demonstrates a positive rate of time preference when he . . .
values consumption now more than consumption in the future.
Which of the following is an example of a timing lag that hinders the use of fiscal policy?
waiting for Congress to pass a budget bill.
Made to produce fiscal stuff?
Capital goods
Not so much acceptable
Big Coin
We want to make a connection between money and government
But it does not have to be connected
Means money is money because we say it is
Fiat
What is the essential characteristic of money?
Generally acceptably
It limits amount of money that can be printed?
Gold is tradeable
Money does not have to be
Governmental
Affects supply of loanable funds
High rate - Possibly low rate too?
- Less saving - Higher interest rate - Less capital formation - More production of present consumption - Goods now rather than later
High rate of time preference
We place a greater value on consumption today rather than tomorrow - Consume more save less
High rate time preference
High rate of time preference
Shifts (savings) to the left
Low rate of time preference
Shifts (savings) to the right
Debit card (not money) is a tool to more easily use checkable deposits
Signature on checks (not money) that authorize transaction?
Which of the following is NOT a part of the authors' metaphor for the boom and bust business cycle?
Spit
Rates correspond to contrast in
Time
The only reason money has value is because we believe other people think it has
Value
