Untitled Flashcards Set

What are financial assets?

Assets that derive value from a contractual claim, such as stocks, bonds, and bank deposits.

Define money.

Any asset widely accepted as a medium of exchange.

What is fiat money?

Money that has no intrinsic value; its value comes from government decree.

What is commodity-backed money?

Money that can be exchanged for a fixed amount of a commodity, like the gold standard.

What is commodity money?

Money that has intrinsic value, such as gold, silver, or cattle.

List the three purposes of money.

Medium of exchange, store of value, and unit of account.

What do stocks represent?

Ownership in a company.

What are bonds?

Debt instruments where the issuer promises to repay with interest.

What is the time value of money formula?

FV=PV(1+r)^t where FV is future value, PV is present value, r is interest rate, and t is time in years.

What components make up M1?

Currency, checkable deposits, and traveler’s checks.

Define M2.

M2 includes M1 plus savings deposits, money market funds, and small time deposits.

What is the money multiplier formula?

1 / Reserve Requirement.

What are reserve requirements?

The minimum fraction of deposits banks must hold in reserves.

What shape is the money demand curve?

Downward-sloping.

What factors influence money demand?

Interest rates, real GDP, price levels, and financial innovation.

What is the shape of the money supply curve?

Vertical, since it is fixed by the central bank.

Name a monetary policy tool used to control money supply.

Open market operations.

What is expansionary fiscal policy?

Policies that increase aggregate demand, such as tax cuts and increased government spending.

Define automatic stabilizers.

Policies that naturally counteract economic fluctuations, like unemployment benefits.

What is the spending multiplier formula?

1 / (1 - MPC), where MPC is the marginal propensity to consume.

What is quantitative easing?

Large-scale asset purchases by the central bank to stimulate the economy.

What is the equation of exchange?

MV = PQ, where M is money supply, V is velocity, P is price level, and Q is output.

What is the relationship between bond prices and interest rates?

Bond prices and interest rates are inversely related.

What is the difference between monetary base and money supply?

Monetary base includes currency and bank reserves, while money supply includes broader forms like checking and savings deposits.

What factors determine money supply?

Controlled by the Federal Reserve through monetary policy.