Principles Of MacroEconomics at ETHZ - ETH Zurich | Flashcards & Summaries

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TESTE DEIN WISSEN

What is meant by the relative price variability and the misallocation of resources?

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TESTE DEIN WISSEN

Inflation distorts relative prices



If prices of some goods are “sticky” (e.g. because of menu costs) relative to other goods, then inflation is creating changes in relative prices that lead to decisions of market participants that are economically inefficient in the sense that it deviates from the optimal allocation of resources



Hence, markets are less able to allocate resources to their best use

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TESTE DEIN WISSEN

How is the value of money determined?

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TESTE DEIN WISSEN

By the supply and demand for money. 

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TESTE DEIN WISSEN

Describe the shoeleather costs

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TESTE DEIN WISSEN

Shoeleather costs are the resources wasted when inflation encourages people to reduce their money holdings.



Inflation reduces the real value of money, so people have an incentive to minimize their cash holdings.



Less cash requires more frequent trips to the bank to withdraw money from interest-bearing accounts



The actual cost of reducing your money holdings is the time and convenience you must sacrifice to keep less money on hand



Also, extra trips to the bank take time away from productive activities

Lösung ausblenden
TESTE DEIN WISSEN

What is meant by confusion and inconvenience?

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TESTE DEIN WISSEN

When the Central Bank increases the money supply and creates inflation, it erodes the real value of the unit of account



Inflation causes dollars at different times to have different real values



Therefore, with rising prices, it is more difficult to compare real revenues, costs, and profits over time

Lösung ausblenden
TESTE DEIN WISSEN

What is meant by menu costs?

Lösung anzeigen
TESTE DEIN WISSEN

Menu costs are the costs of adjusting prices



During inflationary times, it is necessary to update price lists and other posted prices



• This is a resource-consuming process that takes
away from other productive activities

Lösung ausblenden
TESTE DEIN WISSEN

What is meant by the money supply?

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TESTE DEIN WISSEN
  • a policy variable that is controlled by the central bank
  • Through instruments such as open-market operations, the CB affects the quantity of money supplied
  • Therefore the supply of money is (assumed to be) vertical (perfectly inelastic)
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TESTE DEIN WISSEN

Elaborate on reserve requirements and its consequences

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TESTE DEIN WISSEN

Reserve requirements are regulations on the minimum amount of reserves that banks must hold against deposits.



Increasing the reserve requirement decreases the money supply.


Decreasing the reserve requirement increases the money supply.

Lösung ausblenden
TESTE DEIN WISSEN

Elaborate the Open-market operations and it consequences

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TESTE DEIN WISSEN

The CB conducts open-market operations when it buys government bonds from or sells government bonds to the public:



When the CB buys government bonds, the money supply increases.


The money supply decreases when the CB sells government bonds.

Lösung ausblenden
TESTE DEIN WISSEN

Three important dimensions of money

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TESTE DEIN WISSEN

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


The Kinds of Money. 


  • Commodity money takes the form of a commodity with intrinsic value.
  • Fiat money is used as money because of government decree.t does not have intrinsic value.


Money in the Economy.


  • Currency is the paper bills and coins in the hands of the public.
  • Demand deposits are balances in bank accounts that depositors can access on demand.
Lösung ausblenden
TESTE DEIN WISSEN

Explain the fractional-reserve banking system

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TESTE DEIN WISSEN

In a fractional-reserve banking system, banks hold a fraction of the money deposited as reserves and lend out the rest.

Lösung ausblenden
TESTE DEIN WISSEN

Explain the reserve ratio

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TESTE DEIN WISSEN

The reserve ratio is the fraction of deposits that banks hold as reserves.

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TESTE DEIN WISSEN

Explain the Reserves

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TESTE DEIN WISSEN

are deposits that banks have received but have not loaned out.

Lösung ausblenden
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Q:

What is meant by the relative price variability and the misallocation of resources?

A:

Inflation distorts relative prices



If prices of some goods are “sticky” (e.g. because of menu costs) relative to other goods, then inflation is creating changes in relative prices that lead to decisions of market participants that are economically inefficient in the sense that it deviates from the optimal allocation of resources



Hence, markets are less able to allocate resources to their best use

Q:

How is the value of money determined?

A:

By the supply and demand for money. 

Q:

Describe the shoeleather costs

A:

Shoeleather costs are the resources wasted when inflation encourages people to reduce their money holdings.



Inflation reduces the real value of money, so people have an incentive to minimize their cash holdings.



Less cash requires more frequent trips to the bank to withdraw money from interest-bearing accounts



The actual cost of reducing your money holdings is the time and convenience you must sacrifice to keep less money on hand



Also, extra trips to the bank take time away from productive activities

Q:

What is meant by confusion and inconvenience?

A:

When the Central Bank increases the money supply and creates inflation, it erodes the real value of the unit of account



Inflation causes dollars at different times to have different real values



Therefore, with rising prices, it is more difficult to compare real revenues, costs, and profits over time

Q:

What is meant by menu costs?

A:

Menu costs are the costs of adjusting prices



During inflationary times, it is necessary to update price lists and other posted prices



• This is a resource-consuming process that takes
away from other productive activities

Mehr Karteikarten anzeigen
Q:

What is meant by the money supply?

A:
  • a policy variable that is controlled by the central bank
  • Through instruments such as open-market operations, the CB affects the quantity of money supplied
  • Therefore the supply of money is (assumed to be) vertical (perfectly inelastic)
Q:

Elaborate on reserve requirements and its consequences

A:

Reserve requirements are regulations on the minimum amount of reserves that banks must hold against deposits.



Increasing the reserve requirement decreases the money supply.


Decreasing the reserve requirement increases the money supply.

Q:

Elaborate the Open-market operations and it consequences

A:

The CB conducts open-market operations when it buys government bonds from or sells government bonds to the public:



When the CB buys government bonds, the money supply increases.


The money supply decreases when the CB sells government bonds.

Q:

Three important dimensions of money

A:

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


The Kinds of Money. 


  • Commodity money takes the form of a commodity with intrinsic value.
  • Fiat money is used as money because of government decree.t does not have intrinsic value.


Money in the Economy.


  • Currency is the paper bills and coins in the hands of the public.
  • Demand deposits are balances in bank accounts that depositors can access on demand.
Q:

Explain the fractional-reserve banking system

A:

In a fractional-reserve banking system, banks hold a fraction of the money deposited as reserves and lend out the rest.

Q:

Explain the reserve ratio

A:

The reserve ratio is the fraction of deposits that banks hold as reserves.

Q:

Explain the Reserves

A:

are deposits that banks have received but have not loaned out.

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