Monetary Econ Exam 1 Study Guide
Monetary Econ Exam 1 Study Guide Econ 3310
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This 6 page Study Guide was uploaded by Anthony Welch on Wednesday September 21, 2016. The Study Guide belongs to Econ 3310 at East Tennessee State University taught by Dr. Warren Mackara in Fall 2016. Since its upload, it has received 31 views. For similar materials see Monetary Economics in Economics at East Tennessee State University.
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Date Created: 09/21/16
Monetary Economics Study Guide (Exam 1) Introduction/Overview yellow = key term pink = key concept blue = example introduction/overview Depository Institutions– the most familiar type and largest group of financial intermediaries. they include savings and loan associations, credit unions, commercial banks, and mutual savings banks. checkable deposits– deposits that are subject to withdrawal by check. The Federal Reserve – vastly influences how depository institutions act as intermediaries and affect the money supply. also has great influence over other financial markets and institutions. monetary policy – the federal reserve’s efforts to maximize the overall health and stability of the U.S. economy. business cycle – the collection of short-run deviations from the long-run growth path of an economy expansion – economic activity where total quantity of goods and services being sold increases as unemployment decreases. recession – economic activity where total quantity of goods and services being sold decreases as unemployment rises. fiscal policy – government taxing decisions and spending with the intention of speeding up or slowing down certain economic activity laissez-faire – the view that the government should have a hands-off policy in regard to the economy, meaning that the government should not intervene economic activity and let the market fix the problems. Spending Units Surplus Spending Unit (SSU)- an economic unit with income that is greater than expenditures on investment or consumption, more purchasing power than needed to satisfy current wants. An SSU will use its extra income to buy goods, invest, or lend money to DSU. Deficit Spending Unit (DSU)- an economic unit that has spent more than its earned over a period of time, has more current wants than purchasing power can satisfy. A DSU uses the extra income of an SSU to stay afloat until it can begin making a larger profit to exceed its expenditures. default risk-risk that SSU takes of possibly not getting paid back by DSU SSU may attempt to sell the claim, probably at a discount, taking a capital loss liquidity risk-risk that claim can not be sold because of a lack of liquidity Indirect claims through a Financial Intermediary are more liquid than direct claims between SSU and DSU, so it is much more common to do business with an F.I. transaction costs-costs that are involved with a SSU and a DSU finding each other and agreeing on a specific exchange between one another (reduced with financial intermediary). financial intermediary- an entity that acts as a middle man between two parties in a financial transactions. some examples of financial transactions are investment banks, mutual funds, and pension funds. disintermediation-intermediation breaks down (at least some of the funds skip the middle man and go directly from party to party. *disintermediation can cause a credit crisis-where the amount of exchange decreases which can lead to a recession (period of economic decline)* -causes of disintermediation a. lack of confidence in credit worthiness of the DSU b. lack of confidence in financial intermediaries. c. interest ceilings/rising inflation The Cycle of Economics In the U.S. economy, there is a cycle of regulation and deregulation that is controlled by what happens in the economy. When the economy is in recession because of a lack of regulation in a certain area, the government reacts by creating laws that are meant to help the economy out of recession. However, the economy can also go into recession because of certain regulations that had negative effects that were not foreseen by the government, so they must then deregulate certain areas of the economy. Chapter 2 What is money? What do we use money for? – as a medium of exchange (generally accepted in exchange for most goods and services) - money simplifies and encourages exchange - money facilitates specialization within companies, so they narrow their product line and become much more efficient. - increases the want satisfaction with resources, which means the consumer gets more satisfaction with usage of the resources - Unit of Account/Standard of value: to communicate how much things are worth. (primary) - Store of Value – a way of storing unspent income (secondary) - Standard of deferred payment – used to express terms of debt and also to pay off debt - money helps everyone receive the goods and services they need and want in life - money is a catalyst, not a resource (increases velocity of exchange, not the actual item that is ultimately desired) - liquid assets (liquidity – ease, speed, and convenience you can convert financial instrument to medium of exchange without significant exposure to capital loss) o capital loss – selling financial instrument for less than one bought it for What do we use as money? - paper money, metal coins, plastic cards, electronic transaction transaction costs of exchange – expenses associated with exchanging your goods and/or services. this means there will be fewer resources available for production and consumption. information – one of the largest costs has to do with information. each company has to advertise and get the word out to everyone what products they offer, so that other companies and people know where to exchange their money or goods to people who want them for the resources they already have. barter system – direct exchange of goods and services without the use of money problems – must have a double coincidence of wants, where both companies have what the other wants. there would have to be multiple transactions to obtain the item(s) you want. this method discourages exchange because it is complicated and tedious. limits specialization because companies want to produce as many goods and services as possible so they can exchange for more products. How the Federal Reserve Measures Money The Money Supply M1 – the sum of currency held by the public and transaction deposits at depository institutions, which are financial institutions that receive their funds primarily from the public such as commercial banks. M2 – M1 plus savings deposits, small-denomination time deposits (issued in amounts less than $100,000), and retail money market mutual funds. DNFD – a measure of outstanding loans and debts accumulated in the present and past years federal: credit market debt of local, state, and federal governments, corporate bonds, mortgages, and consumer credit. nonfederal: other bank loans, debt instruments, and commercial paper 5 Criteria for a “Good” Measure of Money: 1. durable – so value is not lost by spoilage 2. standardized – so that any two units are identical, such as 2 dimes. 3. + value/weight ratio – so expensive things are convenient to buy 4. acceptable to most people 5. divisible – because different things have different values Money Types: Barter (good for good/service for service) Commodity (value comes from something its made into) Full-Bodied (monetary value is same as value as a commodity) Token Money (monetary value exceeds cost of production) Representative Money (monetary value is greater than value of commodity) Credit Money (any future monetary claim against an individual that can be used to buy goods and services) Electronic Money (money balance recorded electronically e.g. stored- value card) Role of Technology in Money - technology allows the tracking, transferring, and spending of money to happen much more quickly o online banking o online shopping o Apple Pay
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