58 Cards in this Set
| Front | Back |
|---|---|
|
barter system
|
Trading one good for another, without using money
|
|
double coincidence of wants
|
a situation in which two people want some good or service that the other person can provide
|
|
Medium of exchange
|
an item buyers give to sellers when they want to purchase goods and services, money acts as an intermediary between the buyer and the seller.
|
|
Store of value
|
an item people can use to transfer purchasing power from present to future, does not require that money is a perfect store of value.
|
|
Unit of account
|
the yardstick people use to transfer purchasing power from the present to the future, the ruler by which other values are measured.
|
|
Standard of deferred payment
|
an item used not only as a medium of exchange today, but also to purchase today and pay in the future ie. loans and future agreements.
|
|
Commodity money
|
ie gold, silver, cowrie shells, cigarettes, and even cocoa beans; they also have a value from use as something other than money
|
|
Representative Commodity money
|
“Money” that represents a commodity (ex. U.S. money from WWII in 1973)
|
|
Fiat money
|
money without intrinsic value, used as money because of govt. decree, not backed by a commodity only backed by universal faith and trust that the currency has value and nothing more.
|
|
Money Supply
|
the quantity of money available in the economy
|
|
Currency
|
the paper bills and coins in the hands of the public
|
|
Demand (checkable) deposits
|
balances in bank accounts that deposits can access on demand, amounts held in checking accounts
|
|
M1
|
currency, demand deposits, traveler’s checks; very liquid
|
|
M2
|
M1 + savings deposits, small time deposits, money market mutual funds; less liquid in nature
|
|
fractional reserve banking system
|
based on goldsmith’s principle) banks keep a fraction of deposits as reserves and use the rest to make loans.
|
|
reserve requirement:
|
regulations on the min amount of reserves that banks must hold against deposits
|
|
Actual Reserves
|
what the bank really holds
|
|
Required Reserves
|
what the bank MUST hold.
|
|
Excess Reserves
|
any amount beyond what the bank must hold.
|
|
reserve ratio
|
fraction of the deposits that a bank holds as reserve.
|
|
Money Multiplier
|
The amount of dollars each bank generates with each dollar in the reserve...1/ R
|
|
Bank T-account/Bank Balance Sheet
|
a simplified accounting statement that shows a bank’s assets and liabilities.
|
|
Assets
|
include a banks loans, ownership of bonds, and its reserves (which are not loaned out)
|
|
Liabilities
|
a banks deposits
|
|
Bank Capital
|
the difference between a bank’s assets and its liabilities aka the bank’s net worth, must be positive otherwise it’s insolvent or bankrupt, meaning it would not have enough assets to pay back its liabilities
|
|
Leverage
|
term used by financial economists to mean “borrowing”
|
|
Leverage ratio
|
is any one of several financial measurements that look at how much capital comes in the form of debt (loans), or assesses the ability of a company to meet financial obligations
|
|
Capital requirement
|
the amount of capital a bank or other financial institution has to hold as required by its financial regulator
|
|
Credit crunch / Financial Crisis of 2008–2009
|
a series of bank and insurance company failures triggered a financial crisis that effectively halted global credit markets and required unprecedented government intervention
|
|
Consumer Price Index (CPI)
|
primary measure of inflation used in the US, measures the “typical” consumer's cost of living, based on the prices in a fixed basket of goods and services that represents the purchases of the average family of four.
|
|
BLS
|
U.S. Bureau of Labor Statistics
|
|
COLAs
|
cost-of-living-adjustments, labor unions would commonly negotiate wage contracts with them which guaranteed that their wages would keep up with inflation
|
|
calculate CPI
|
(expenditures in the current year / expenditures in the base year) * 100
|
|
How to calculate inflation rate
|
year CPI - baseyear CPI
----------------------------------
baseyear CPI
x100
|
|
The CPI basket “contents”
|
consisting of the different items individuals, businesses, or organizations typically buy.
|
|
Problems with the CPI
|
that the change in the total cost of buying a fixed basket of goods and services over time is conceptually not quite the same as the change in the cost of living, because the cost of living represents how much it costs for a person to feel that his or her consumption provides equal level …
|
|
Substitution bias
|
the rise in the price of a fixed basket of goods over time - tends to overstate the rise in a consumer’s true cost of living, because it does not take into account that the person can substitute away from goods whose relative prices have risen.
|
|
Indexation
|
Automatically corrected for inflation by law of contract. ex. the adjustments in social security payments and federal income tax brackets.
|
|
Correcting prices over time / Comparing Dollar Figures from Different Times
|
Amount in Today’s dollar= (Amount in year T dollars) multiplied by (Price level today/price level in year T)
|
|
nominal interest rate
|
the interest rate NOT corrected for inflation. The rate of growth in the dollar (face) value of a deposit or debt
|
|
real interest rate
|
adjusted for inflation, the rate of growth in the purchasing power of a deposit or debt.
|
|
Inflation Rate
|
percentage change in CPI
inflation rate = ((CPI yr 2 - CPI yr 1)/ CPI yr 1) x 100
|
|
inflation
|
a general and ongoing rise in the level of prices in an entire economy.
|
|
inflation fallacy
|
“Inflation erodes real incomes”
|
|
costs of inflation
|
Inflation is a general increase in prices of the things people buy and sell. (ex. their labor)
|
|
Menu Costs
|
the costs of changing prices
Printing new menus, mailing new catalogs, etc.
|
|
misallocation of resources from relative price variability
|
Not all prices rise at the same time
|
|
confusion and inconvenience
|
Inflation changes the ‘yardstick’ which complicates:
-Long range planning
-Comparison of dollar amounts over time
|
|
expected inflation
|
a future rate of inflation that consumers and firms build into current decision making
|
|
unexpected inflation
|
will tend to hurt those whose money received, in terms of wages and interest payments, does not rise with inflation
|
|
hyperinflation
|
inflation exceeding 50% / month
|
|
PPI: (Producer Price Index)
|
based on prices paid for supplies and inputs by producers of goods and services.
|
|
International Price Index
|
based on the prices of merchandise that is exported or imported.
|
|
Employment Cost Index
|
measures wage inflation in the labor market.
|
|
GDP deflator
|
a price index that includes all the components of GDP.
|
|
Core Inflation Index
|
calculated by taking the CPI and excluding volatile economic variables.
|
|
deflation
|
severe negative inflation, money is worth more.
|
|
consequences of deflation
|
deflation can make it very difficult for monetary policy to address a recession
|
Econ 201: Test 3