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