Macroeconomics Review Flashcards

Flashcards covering key concepts related to macroeconomics and monetary policy, based on the ACDC Leadership 2020 Unit 4 lecture notes.

What is the Barter System?

Goods and services are traded directly without the exchange of money.

What is a major problem with the Barter System?

The Double Coincidence of Wants - each trader has to have something the other wants for trade to occur, which doesn't always happen.

What is money?

Anything that is generally accepted as payment for goods and services.

What are the 3 functions of money?

1. A Medium of Exchange
2. A Unit of Account (Measure of Value)
3. A Store of Value

What are examples of commodity money?

Gold, silver, cigarettes, etc.

What are examples of fiat money?

Paper Money, Coins, Digital Currency

What makes money effective?

1. Generally Accepted
2. Scarce
3. Portable and Dividable

What is the purchasing power of money?

The amount of goods and services a unit of money can buy.

What decreases purchasing power?

Inflation

What is the role of the Federal Reserve?

To regulate banks and make sure people have faith in our financial system.

What is monetary policy?

When the central bank adjusts the money supply to speed up or slow down the economy.

How does the Fed adjust the money supply?

1. The Reserve Requirements (Ratios)
2. The Discount Rate
3. Open Market Operations

What is the reserve requirement (reserve ratio)?

The percent of deposits that banks must hold in reserve (the percent they can NOT loan out).

What happens when the Fed decreases the reserve ratio?

1. Banks hold less money and have more excess reserves.
2. Banks create more money by loaning out excess.
3. Money supply increases, interest rates fall, AD up.

What happens when the Fed increases the reserve ratio?

1. Banks hold more money and have fewer excess reserves.
2. Banks create less money.
3. Money supply decreases, interest rates up, AD down.

What is the discount rate?

The interest rate that the Fed charges commercial banks.

To increase the money supply, the Fed should the discount rate.

Decrease

To decrease the money supply, the Fed should the discount rate.

Increase

What are open market operations?

When the Fed buys or sells government bonds (securities).

To increase the money supply, the Fed should government securities.

Buy

To decrease the money supply, the Fed should government securities.

Sell

What is the federal funds rate?

The interest rate that banks charge one another for one-day loans of reserves.