ECON 1002 Macroeconomics Final Exam

Money:

Basic function is as an accepted medium of exchange, standard of value, and a store of wealth. Allows all goods and services to be valued in the same objective way: i.e. in relation to a monetary value.

Medium of Exchange:

Anything that's used to determine value during the exchange of goods and services

Barter:

exchange of one commodity or service for another

Unit of Account:

A common unit for measuring how much something is worth

Store of Value:

Holds its value over a period of time

Currency:

Government-issued coins and paper notes that may be used to exchange goods and services

essentially, the physical representation of money

Commodity Money:

A good that is used as a medium of exchange but also has intrinsic worth because it has other uses. Gold or silver coins are commodity money.

Representative Money:

Objects that have value because the holder can exchange them for something else of value

Fiat Money:

Money that has value because the government has ordered that it is an acceptable means to pay debts

Bank:

An institution that receives, lends, borrow, exchange, issues and safeguards money.

National Bank:

A commercial bank chartered by the federal government.

Bank Run:

A phenomenon in which many of a bank's depositors try to withdraw their funds due to fears of a bank failure.

Greenback:

Paper money used during the Civil War in the North

Gold Standard:

A monetary system in which paper money and coins are equal to the value of a certain amount of gold

Federal Reserve System:

1913 - central banking system of the US - created by the Federal Reserve Act - quasi public system

Central Bank:

Bank that can lend to other banks in times of need, a "bankers' bank".

Member Bank:

Bank belonging to the Federal Reserve System.

Federal Reserve Note:

The national currency used today in the U.S.

Federal Deposit Insurance Corporation (FDIC):

(FDI) A United States government corporation created by the Glass-Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank

Money Supply:

The total value of financial assets in the economy that are considered money. These are several different measures of the money supply, called monetary aggregates.

Liquidity:

money or things which can be quickly and easily converted into money with little or no loss of purchasing power.

Demand Deposit:

Direct cash when you write someone a check

Money Market Mutual Fund:

a fund that pools money from small savers to purchase short-term government and corporate securities

Fractional Reserve Banking:

A banking system that keeps only a fraction of funds on hand and lends out the remainder

Default:

A condition that exists when a borrower cannot repay a loan

Mortgage

Specific type of loan used to buy real estate

Credit Card:

A card authorizing the holder to buy goods or services

Interest:

the price paid for the use of borrowed money

Principal:

the amount of money that is borrowed.

Debit Card:

Money directly withdrawn from account. If not enough money, overdraft is available (Bank lends money to customer, who pays back with interest when possible.)

Creditor:

person or institution to whom money is owed.

Three Uses of Money:

1. Money as a medium of exchange
2. Money as a unit of account
3. Money as a store of value

Six Characteristics of Money:

1. Durability
2. Portability
3. Divisibility
4. Uniformity
5. Limited Supply
6. Acceptability

financial intermediaries

firms that extend credit to borrowers using funds raised from savers

bond

a legal promise to repay a debt (including principal amount & regular interest payments)

principal amount

the amount originally lent

maturation date

the date at which the principal will be repaid

coupon payments

regular interest payments made to the bondholder

coupon rate

the interest rate promised when a bond is issued

annual coupon formula

annual coupon \= coupon rate x principal amount of bond

stock (equity)

a claim to partial ownership of a firm

dividend

a regular payment received by stockholders for each share that they own

risk premium

the rate of return that financial investors require to hold risky assets minus the rate of return on safe assets

diversification

the practice of spending one's wealth over a variety of different financial investments to reduce overall risk

mutual fund

a finacial intermidiary that sells shares in itself to the public then uses the funds raised to buy a wide variety of financial assets

international capital flows

purchases or sales of real and financial assets across international borders

capital inflows

purchases of domestic assets by foreign households and firms

capital outflows

purchases of foreign assets by domestic households and firms

net capital inflows

capital inflows minus capital outflows

trade balance (net exports)

the value of a country's exports less the value of its imports in a oarticular period

trade surplus

when exports exceed imports, the difference between the value of a country's exports and the value of its imports in a given period

trade deficit

when imports exceed exports, the difference between the value of a country's imports and the value of its exports in a given period

investment formula

I \= S + NX
I \= S + KI

net exports formula

NX \= S - I

appreciation

an increase in the value of a currency relative to other currencies

balance-of-payments deficit

The net decline in a country's stock of international reserves over a year

balance-of-payments surplus

The net increase in a country's stock of international reserves over a year

depreciation

a decrease in the value of a currency relative to other currencies

devaluation

a reduction in the official value of a currency (in a fixed exchange rate system)

fixed exchange rate

an exchange rate whose value is set by official government policy

flexible exchange rate

an exchange rate whose value is not officially fixed but varies according to the supply and demand for the currency in the foreign exchange market

foreign exchange market

the market on which currencies of various nations are traded for one another

fundamental value of the exchange rate (or equilibrium exchange rate)

the exchange rate that equates the quantities of the currency supplied and demand in the foreign exchange market

international reserves

foreign currency assets held by a government for the purpose of purchasing the domestic currency in the foreign exchange market

law of one price

if transportation costs are relatively small, the price of an internationally traded commodity must be the same in all locations

nominal exchange rate

the rate at which two currencies can be traded for each other

overvalued exchange rate

an exchange rate that has an officially fixed value greater than its fundamental value

purchasing power parity (PPP)

the theory that nominal exchange rates are determined as necessary for the law of one price to hold

real exchange rate

the price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency

revaluation

an increase in the official value of a currency (in a fixed exchange rate system)

speculative attack

a massive selling of domestic currency assets by financial investors

undervalued exchange rate

an exchange rate that has an officially fixed value less than its fundamental value