AP Econ Macro Chapter 4

Question 1

What makes a currency an efficient form of money?

Answer 1

1. Portability
2. Uniformity
3. Durability
4. Stability in Value
5. Acceptability

Question 2

What is a “Medium of Exchange”?

Answer 2

• A medium of exchange is an item that buyers give to sellers when they want to purchase goods or services.
• Anything that is readily acceptable as payment.

Question 3

What is a “Unit of Account”?

Answer 3

• A yardstick people use to post prices and record debts.

Question 4

What is a “Store of Value”?

Answer 4

• An item that people can use to transfer purchasing power from the present to the future.

Question 5

What is “Liquidity”?

Answer 5

The ease with which an asset can be converted into the economy’s medium of exchange.

Question 6

What are the four kinds of money?

Answer 6

1. Commodity Money: Takes the form of a commodity with intrinsic value.

     Examples: Gold, Silver, cigarettes.

2. Fiat Money: Used as money because of government decree.

     Does not have intrinsic value.
   
     Examples: Coins, currency, check deposits.

3. Currency: The paper bills and coins in the hands of the public.
4. Demand Deposits: Balances in bank accounts that depositors can access on demand by writing a check.

Question 7

What’s up with all those “M”s?

Answer 7

M0= Coins in currency

M1= M0 + checkable deposites

     1. Currency

          Token money, Federal reserve notes, Little intrinsic value

     2. Checkable Deposits

           Commercial banks, Thrift institutions i.e. Savings and Loans

M2= M1 plus…

     3. Near-monies
     4. Saving Deposites

           Money market deposit accounts

     5. Smaller Time Deposits (less than $100,000)
     6. Money Market Mutual Funds 

M3= M2 plus…

      7. Large Time Deposites (greater than $100,000)

Question 8

Money is worth more _______ than it is _______!!

Answer 8

(Now, Later)

Question 9

Interest Rates are?

Answer 9

• The “price” of money now versus money in the future.
• They coordinate the value that is lost in money over time.

Question 10

What is the “Present Value Formula”?

Answer 10

PV= FV/(1+r)ⁿ

FV= PV*(1+r)ⁿ

^{PV= Present Value}

^{FV= Future Value}

r= the rate of interest per period

n= the number of compounding periods per year

Question 11

What is the money multiplier for the reserve ratio?

Answer 11

1/required reserve ratio

Question 12

When a bank makes a loan from its reserves, the money supply…

Answer 12

MS up

Question 13

What are the determinants of MD?

Answer 13

1. Transactions Demand: moneys used to purchase goods
2. Procautionary Demand: Money for unexpected needs
3. Speculative Demand: Money as a store of wealth

Question 14

What is the “Assets Demand” equation?

Answer 14

Procautionary demand + speculative demand

Question 15

What is the “Total Demand” equation?

Answer 15

Transaction demand + asset demand

Question 16

What determines the The Money Supply?

Answer 16

Fed Policy

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