Money
What is commodity money?
Money that has value because it is made of something valuable (gold, silver, etc.)
If the government sells you a bond for $400 at an interest rate of 10%, with a maturity rate of 5 years, how much will you be paid back after that time has elapsed?
$440
If you deposit $500 into your bank account and the bank then loans $400 to another bank customer, why is the total money supply $900, even though only $500 was originally deposited.
Both you and the other bank customer have the ability to withdraw your money at any time.
What are the two goals of the Federal Reserve?
Limit Unemployment and control inflation
The gold-standard that the US used until the 1970's meant US currency was what type of money?
Commodity-backed Money
Why are stocks riskier than bonds?
The value of stocks depends on the company performing well, while a bond is required to be paid when the maturity date is reached.
In a supply and demand graph for money, why is the money supply curve a vertical line?
The Federal Reserve has major influence over the total money supply in the economy.
When the Fed increases the Federal Funds Rate, what is it hoping will happen to interest rates on loans throughout the economy?
They will increase also.
Money that gets its value because the government says it does is called what?
Fiat money
Put these in order from most to least riskiest investments:
Bank Deposts, Bonds, Commodities, Index Funds, Stocks
Commodities, Stocks, Index Funds, Bonds, Bank Deposits
If you deposit $502 and the reserve requirement is 2%, what will be the total increase in the money supply?
Total Money Supply = 1/(reserve %) X initial deposit
Total Money Supply = 50 x $502 = $25,100
When the Fed engages in Open Market Operations, what is it doing?
It is buying or selling bonds to banks-->impact the money supply-->change the Federal Funds Rate
Unit of Account
In financial markets, what is the source of money for business investment?
Household Savings
If the money supply in the economy increases and the demand for money decreases, what will happen to interest rates: will they increase, decrease, or stay the same?
Decrease
If the Federal Reserve engages in expansionary monetary policy, then what is its goal in decreasing interest rates?
Make it cheaper for consumers/businesses to borrow money---> greater demand for goods/services in the economy
If money did not serve as a _____________________, then when you went to Starbucks you would have to see if you could a buy a coffee with your laptop.
Medium of exchange
A bond is originally sold by the government for $10 at a 10% interest rate. Demand for bonds increases, so the owner of the bond can now sell it for $20. What is the new bond yield?
Yield= Interest Payment / Current Bond Price
Yield= $1 /$20 = 5%
Why do exporters from the US want the value of their country's currency to have lower purchasing power than the Chinese yuan?
Chinese importers, who have to buy dollars with yuan, can purchase more dollars per yuan if the value of the dollar is lower. This leads to importers being able to spend more dollars to buy the US exporters goods.