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

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

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44 Terms

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Autarky

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

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Barter Economy

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

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Double Coincidence of Wants (DCW)

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

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Monetary Economy

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

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Unit of Account

A standard unit used to quote prices.

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Store of Value

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

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Medium of Exchange

A standard object used to exchange for goods and services.

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Commodity Money

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

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Fiat Money

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

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M1

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

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M2

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

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Fractional Reserve Banking System

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

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Deposit Insurance

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

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Asset

An item of value owned by the bank.

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Liability

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

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Balance Sheet

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

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Net Worth

Assets minus liabilities.

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Required Reserves (RR)

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

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Excess Reserves (ER)

Reserves held in excess of the legal minimum.

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Money Multiplier

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

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Federal Reserve System (The Fed)

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

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Central Bank Independence

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

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Board of Governors

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

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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.

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Federal Funds Rate (FFR)

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

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Open Market Operations

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

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Federal Funds Rate (FFR)

The rate charged on borrowings/lendings between banks.

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Expansionary MP

Monetary Policy that helps the economy "expand."

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Contractionary MP

Monetary Policy that slow down the economy.

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Lender of Last Resort (LLR)

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

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Quantitative Easing (QE)

Open-market purchases of assets other than Treasury bills.

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Large-Scale Asset Purchases (LSAP)

To lower long-term rates.

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National Debt (Public Debt)

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

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Primary Budget (PB)

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

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Secondary Budget (SB)

T - G - Interest Payments on Outstanding Debt

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Sovereign Defaults

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

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U.S. Debt Ceiling

Outstanding Treasury debt cannot exceed $36.1 Trillion.

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Exchange Rate

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

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Currency 'A' Appreciates

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

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Currency 'A' Depreciates

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

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Country A Devalues its Currency

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

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Country A Revalues its Currency

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

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Purchasing-Power Parity (PPP)

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

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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.