ECON 202 - Money and Banking, Central Banking, Monetary Policy, Budget Deficits, Public Debt, and Foreign Exchange Market Flashcards

Flashcards covering key vocabulary from lectures on Money and Banking, Central Banking, Monetary Policy, Budget Deficits and Public Debt, and the Foreign Exchange Market.

Autarky

An economic system without trade, where each consumer produces only what they need for survival.

Barter Economy

A system of exchange where goods are traded directly for other goods without using money.

Double Coincidence of Wants (DCW)

A situation in a barter economy where both parties involved in a trade have what the other desires.

Monetary Economy

An economy where goods are exchanged for money, making transactions easier and increasing productivity.

Unit of Account

A standard unit used to quote prices.

Store of Value

The ability of money to store wealth, although it might have a negative return.

Medium of Exchange

A standard object used to exchange for goods and services.

Commodity Money

An object used as a medium of exchange that has substantial value in alternative uses.

Fiat Money

Government-backed currency with little value as a commodity, maintaining value only as a medium of exchange.

M1

The narrowest definition of money supply, including coins, paper money, traveler’s checks, and checking accounts.

M2

M1 plus money market deposit accounts, money market mutual funds, and savings accounts.

Fractional Reserve Banking System

A banking system where total reserves are a fraction of total deposits.

Deposit Insurance

Insurance that guarantees deposits, reducing the risk of bank runs but potentially creating moral hazard.

Asset

An item of value owned by the bank.

Liability

An item of value owed by the bank to someone else (debt).

Balance Sheet

Accounting statement showing the values of all assets, liabilities, and net worth of a bank.

Net Worth

Assets minus liabilities.

Required Reserves (RR)

A fraction of checking deposits that must be kept as a reserve inside the bank.

Excess Reserves (ER)

Reserves held in excess of the legal minimum.

Money Multiplier

The ratio of the change in money supply to the new deposits.

Federal Reserve System (The Fed)

The central banking system of the United States, responsible for managing monetary policy.

Central Bank Independence

The concept that the central bank’s decisions cannot be dictated by the federal government.

Board of Governors

The governing body of the Federal Reserve System, consisting of 7 members.

Federal Open Market Committee (FOMC)

The committee within the Federal Reserve that decides on short-term interest rates and the size of the money supply.

Federal Funds Rate (FFR)

The prevailing interest rate in the short-term interbank borrowing/lending market.

Open Market Operations

Purchases or sales of government securities by the Fed in open markets to influence interest rates and the money supply.

Federal Funds Rate (FFR)

The rate charged on borrowings/lendings between banks.

Expansionary MP

Monetary Policy that helps the economy "expand."

Contractionary MP

Monetary Policy that slow down the economy.

Lender of Last Resort (LLR)

During financial distress, the Fed can step in as the 'lender of last resort'.

Quantitative Easing (QE)

Open-market purchases of assets other than Treasury bills.

Large-Scale Asset Purchases (LSAP)

To lower long-term rates.

National Debt (Public Debt)

The total indebtedness of the economy at a moment in time, accumulated from past budget deficits.

Primary Budget (PB)

The difference between taxes (T) and public spending (G).

Secondary Budget (SB)

T - G - Interest Payments on Outstanding Debt

Sovereign Defaults

Unilaterally decide "not to pay back" a fraction of or all their outstanding public debt.

U.S. Debt Ceiling

Outstanding Treasury debt cannot exceed $36.1 Trillion.

Exchange Rate

The price in terms of one currency at which another currency can be exchanged.

Currency 'A' Appreciates

When you need more of currency B to purchase 1 unit of currency A.

Currency 'A' Depreciates

When you need less of currency B to purchase 1 unit of currency A.

Country A Devalues its Currency

When it requires fewer units of currency B for a unit of currency A.

Country A Revalues its Currency

When it requires more units of currency B for a unit of currency A

Purchasing-Power Parity (PPP)

Is a theory of "long run exchange rate" determination.

Calculating Purchasing-Power Parity (PPP)

PPP is calculated by comparing the prices of a identical goods between two countries. The exchange rate that equalizes the prices of the identical good is the PPP exchange rate.