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Econ 102: Monetary System
describe purchasing power parity
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ratio of currency values is the same as ratio of price
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what must you do to find real exchange rate/
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convert to common currency & compare
pp |
What are the 3 key attributes of money?
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medium of exchange
-unit of account
-store of value |
What does liquidity refer to?
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ease of converting an asset into cash
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What is the name for the banking system used in the US and what does it require to work?
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Fractional reserve system=>only a fraction of deposits are kept as reserves, requires that people have confidence their $ will be there when they need it, and wont demand deposits all at once
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What are a banks assets & liabilities?
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assets=reserves +loans
liabilities=deposits |
What does the $ multiplier tell us?
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# of dollars generated with each $ of deposit
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What are the feds responsibilities?
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-oversight
-money supply(open market operations, setting reserve requirement)
-making loans to banks w/ low liquidity |
how does fed's buying of bonds affect money supply? does $ supply increase by the amount they buy?
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no, that amount*money multiplier, cause people deposit that money in banks and it gets lent out
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Why might a bank increase the reserve ratio if it wanted to increase money supply?
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for extra security, compensate with buying more bonds, open market operations
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What economic variables does the fed directly influence?
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discount rate, reserve ratio, open market operations(bond selling & buying)
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what is price instability?
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extreme inflation or deflation
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does inflation reduce purchasing power?
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in long term, no, classical theory says nominal changes don't affect real variables, so it will increase price level but also wages
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identify some other costs of inflation?
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shoeleather costs, tax distortions(allinterest earned is treated as income, when real interest rate could be negative), relative price variability, arbitrary redistribution of wealth(those with property become richer),
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