Eco 201 Unit 6 Homework Assignment Assignment Direction At the end of each chapter is a section titled âKey Conceptsâ, and next to each concept is a corresponding page where you will find its definition. Please expand on the textâs given definition, using other relevant terms from the chapter, and also give a practical example of that key concept. Please donât simply supply the text definition. This is not what I want. Iâm looking for your input showing a basic understanding of each âKey Conceptâ. A 1 or 2 sentence answer is not acceptable, nor is a few bullet points. Show me you understand the concept. Please see the attached documents. The key concepts are what you will need to write the paper. The example is a paper from last week that someone else did for me that I got a perfect score on. Please use APA formatRunning head: KEY CONCEPTS IN MACROECONOMICSKey Concepts in MacroeconomicsRobert HicksPost University1Running head: KEY CONCEPTS IN MACROECONOMICS2Key Concepts in MacroeconomicsMoney; is an officially-issued legal tender which consist of coin and currency. Money isnormally synonymous with cash, including negotiable instruments such as checks. It is themedium of exchange that facilitates trade.Medium of exchange: Money is used in the buying and selling of goods and services. Inabsence of money, goods would be exchanged via barter trade i.e. goods being traded for othergoods in transactions. Barter trade is arranged on the basis of mutual need. Such arrangementsare almost impossible. Money eliminates the need of double coincidence of wants.Unit of account; Money is as a yardstick to measure value of products in economictransactions. Money helps in attaching prices on goods and services. it is easy to assign value togoods using prices.Store of value; If you work today and earn 50 dollars, you can hold on to the moneybefore you spend it because its value will hold until the next day, week or month. Holding moneyis a more effective way of storing value than holding perishable items which might rot. Money isnot an effective storage of value though; inflation erodes the value of money.Liquidity; is the ease at which an asset can be converted to cash without incurring extracost. Liquid assets are easily converted into cash for example government treasury bills and shortterm loans. Illiquid assets are not easily converted to cash and include long term bonds.Commodity money; is a type of money that derives its value from a commodity it is madeof. It consists of objects which have value in them as well as the value in their use as money. Forexample options.Running head: KEY CONCEPTS IN MACROECONOMICS3Fiat money; refers to money that a government has declared to be legal tender. It ismoney issued by the state and its neither fixed in value in terms of any objective standard norconvertible to any other thing by law. Its used as money because of government decree but it hasno intrinsic value.Currency: A form of money that is generally accepted issued by a government andcirculated in an economy. It consists of coins and notes. Its the basis of trade. Mainly used as amedium of exchange for goods and services. Examples of currencies include the dollar and theeuro.Demand deposit; refers to an account with a financial institution that allows depositorsto withdraw their funds from the account without warning or any time they feel the need. Thesedeposits are a key component of the M1 money supply. An example of a demand deposit is achecking account.Federal Reserve; the fed is the central bank of the United States. It is the most powerfulfinancial institution in the world. It was founded by the U.S. Congress in early 1990s to providethe country with a stable, flexible, safe financial and monetary system. The fed is considered asthe mother of central banks. [ CITATION Ham12 l 1033 ]Central bank; is a supreme bank that regulates other banks of a nation and is charged withthe mandate of ensuring economic stability of a nation. It formulates monetary policy to regulatethe money supply in the economy. Uses tools such as reserve ratio and discount rates to stabilizethe economyRunning head: KEY CONCEPTS IN MACROECONOMICS4Money supply; is the process by which money circulates in an economy. Money supplyin an economy is mainly controlled by the central bank. When the money supply is high thecentral bank formulates contractionary monetary policy to bring it down and expansionarypolicies when the supply is low.Monetary policy; refers to the guidelines set by the central bank to control money supplyin an economy. The central bank uses three types of tools in monetary policy; they include openmarket operations, discount loans and reserve requirements. Open market operations arepreferred because they are more liquid. [ CITATION Ham12 l 1033 ]Reserves; are currencies set aside by the central bank or any other commercial banks tocushion the bank against liquidity risk. These funds are not lend out to customers in case ofbanks but instead preserved to meet future needs. The central requires banks to keep a proportionof their capital with the central bank.Fractional Reserve Banking; is a banking system where only a proportion of bankdeposits are backed by actual cash on hand and are available for withdrawal. This system aims atexpanding the economy by freeing up capital which can be loaned to other parties. [ CITATIONHam12 l 1033 ]Reserve Ratio’; is the percentage of depositors’ balances that banks should have at hand ascash. It is a requirement set by central bank of country. The higher the reserve ratio the lower themoney supply consequently the lower the reserve ratio the higher the money supply.Running head: KEY CONCEPTS IN MACROECONOMICS5Money multiplier ; is a ratio of commercial bank money to central bank money under asystem of fractional-reserve banking which measures the maximum amount of commercial bankmoney that a given unit of central bank money can be create. The multiplier effect size dependson the proportion of deposits which banks are to hold as reserves.Bank capital; It represents the net worth of the bank. Its the difference between the valueof a assets of a bank and the value of its liabilities. The assets a bank includes; governmentsecurities, cash and loans like letters of credit, inter-bank loans and mortgages. The liabilitiesinclude customer deposits.Leverage; is the use of debt to finance operations of a bank. Used when the bank or afirm has insufficient capital to finance its operations as a result of low equity capital. Representsthe amount of funds borrowed from other financial institutions at a cost. Leverage magnifiesgains. [ CITATION Adr10 l 1033 ]Leverage ratio; is the ratio of debt to equity financing in a financial institutions. Measuresthe percentage of total capital raised through debt. Low leverage ratio is recommended since itimplies that the financial institution is self sustained.Capital requirement; is the minimum amount of capital required of commercial banks bythe central bank. The aim is to regulate the capacity of central banks. These requirements areoften adjusted to suit the prevailing economic conditionsOpen market operations; activities performed by a central bank that involves buying orselling government securities especially bonds on the open market. Used as a primary monetarypolicy. The government buys bonds when money supply is low and sells when there is highmoney supply.Running head: KEY CONCEPTS IN MACROECONOMICS6Discount rate; is the interest rate that the central bank charges commercial banks andother financial institutions on the loans it issues to them disc. High discount rate discouragesborrowing of commercial banks and reduces money supply in the economy.Reserve requirement; is also called cash reserve ratio. It is a central bank regulation, thatsets the minimum percentage of customer notes and deposits that each commercial bank musthold as reserves instead of lending out. Increasing reserve requirement reduces money supplywhile reducing the reserve requirement increases money supply in the economy.Federal funds rate; refers to the rate of interest at which depository financial institutionsactively trade federal funds (balances held at the Federal Reserve) with each other, on anuncollateralized basis usually overnight.Quantity Theory of Money; is an economic theory which advocates for a positiverelationship between the long-term price of goods and changes the supply of money. The theorystates that an increase in money supply in the economy will eventually lead to a proportionateincrease in the prices of goods and services.Nominal variable; It is sometimes referred to as a categorical variable. This is a variablethat has two or more categories with no intrinsic ordering to the categories. You cant rank thecategories. An example is gender which has two categories; female and male but there is nointrinsic ranking of the categories.Real variable; refers to a function which takes as input a real number, normallyrepresented by the variable x, to produce another real number, the value of the function,normally denoted f(x).Running head: KEY CONCEPTS IN MACROECONOMICS7Classical dichotomy; refers to an idea of analyzing separately both the nominal and realvariables. It is attributed to pre-Keynesian and classical economics. An economy exhibits theclassical dichotomy if real variables can be analyzed without considering their nominalcounterparts, the interest rate and the money value of output. It means that real variables can beobtained without the knowledge of the level of the nominal money supply .Neutrality of money; is an economic theory which states that the changes in aggregatemoney supply affect nominal variables only; thus an increase in the supply of money willincrease all wages and prices proportionately, but would not affect real economic output ,unemployment levels or real prices. This theory is based on the idea that varying the moneysupply wont change the aggregate supply and demand of goods.Velocity of money; is the rate at which money changes hands, circulates or turns over inan economy in a particular period of time. High velocity of money means the same amount ofmoney is used to facilitate a large number of transactions. Its given by the ratio of GNP to astock of money.Quantity equation; is an equation that is used to describe the relationship between thestock of money and aggregate expenditure: Given by MV = PY. Where p represents the pricelevel and Y represents real GDP. Change in money stock equals change in nominal transactions.[ CITATION Fri05 l 1033 ]Running head: KEY CONCEPTS IN MACROECONOMICS8Inflation tax; is the loss of value suffered by holders of cash and fixed income as well ason fixed-rate bonds as a results of the inflation effects; or tax on capital gains resulting frominflation.Fisher Effect; is a theory proposed by an economist by the name Irving Fisher whichdescribes the relationship between inflation and interest rates (real and nominal). It states thatreal interest rate is equal to nominal interest rate less expected inflation rate. [ CITATIONFri05 l 1033 ]Shoe leather cost; Is the cost of effort and time ( i.e. the energy and opportunity cost oftime )that people spend in an attempt to counter-act the negative impacts of inflation, such asmaking additional trips to the bank and holding less cash.Menu cost; is the cost a firm incurs as a result of changing the prices of its goods. Thename originates from the cost of printing new menus by restaurants, although economists use itto mean the costs of changing nominal prices in general.
