Chapter 15 and 16 Flashcards

Flashcards based on lecture notes for Chapters 15 and 16.

What is a bank run?

Attempt by many of a bank's depositors to convert transactions and time deposits into currency out of fear that the bank's liabilities may exceed its assets.

What is the definition of money?

Any medium that is universally accepted in an economy both by sellers of goods and services as payment for those goods and services and by creditors as payment for debts.

What is the medium of exchange?

Any item that sellers will accept as payment; money serves as a medium of exchange.

What is the relationship between the price of a bond and the interest rate?

Inverse relationship; as the price goes up, interest rate goes down and as price goes down, interest rate goes up.

What is quantitative easing (QE)?

Federal Reserve open market purchases intended to generate an increase in bank reserves at a zero interest rate.

What is the effect of expansionary monetary policy on exports and imports involving currency exchange?

If investing in a higher rate a currency will appreciate, making it cheaper for that country to buy goods from another country, while making it more expensive for the other country to buy goods from them. Exports would go up while imports would go down for the country with the lower rate,. The opposite is true for the country with the higher rate.

List Monetary Policy Tools

Open market operations (Fed Buying), changes in the reserve ratio, changes in the interest rates paid on reserves, and discount rate changes.

What happens to interest rates during contractionary monetary policy?

Interest rates rise.

What are the tools of Contractionary Monetary Policy?

Selling, open market operations go down, reserve ratio goes down, Federal Reserve Fund goes down, and discount rates go down.

What is the Equation of Exchange?

Ms(V) = P(Y) where Ms = money balances held by nonbanking public, V = income velocity of money, P = price level or price index, Y = real GDP per year

What is the Quantity theory of money and prices?

The hypothesis that changes in the money supply lead to equiproportional changes in the price level. If V and Y are constant, then an increase in the money supply by, say, 20 percent, can lead to only a 20 percent increase in the price level.

What is the Federal Fund Market?

A market made up mostly of banks in which banks can borrow reserves from other banks that want to lend them. Federal funds are usually lent for overnight use.

What is Discount Rate?

The interest rate that the Federal Reserve charges for reserves that it lends to depository institutions. It is sometimes referred to as the rediscount rate or, in Canada and England, as the bank rate

Federal Fund Rate

The interest rate that depository institutions pay to borrow reserves in the interbank federal funds market.

How do you calculate the Money Multiplier?

1/required reserve ratio

What is the Foreign Exchange Rate?

The price of one currency in terms of another.

What is a Current Account?

A category payments transactions that measures the exchange of merchandise, the exchange of services, and unilateral transfers.

What is a Financial Account?

A category of balance of payments transactions that measures flows of financial assets.