[ECON308] - Midterm Exam Guide - Everything you need to know! (29 pages long)

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ECON308
MIDTERM EXAM
STUDY GUIDE
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ECON 308 EXAM 1 Study Guide
Circular flow:
Income>Spending>Production>Jobs>Income…..
Chapter 1:
-The Federal Reserve controls the money in the economy, and plays a
major role in the circular flow diagram
-Land, Labor, and Capital are all FINITE
-Price inflation occurs when demand is HIGH but production is LOW
-When inflation occurs, money is losing its purchasing power
-Inflation can be sustained if you constantly and gradually feed money
into the economy
-Other countries money loses value over time, but not America's
-High inflation countries need to make more money every few years
-Deflation gradual decrease in the level of prices and opposite of
inflation, with a graduate increase in the value of money(reluctance to
spend money, defer purchase until money is worth more, causes a
recession)
-Debts owed will not get deflated, but any assets will
-A lot of our money is abroad because people want to hold on to stable
money
-Inflation undermines money as a store of value
Money<>Inflation
Functions of Money:
1. Medium of exchange (Barter) - coincidence of wants
2. Unit of Account - Valuation put in terms of monetary unit
3. Store of Value - has a time dimension
Characteristics of Money:
1. Portable - have access to purchasing power
2. Divisible - use it in large and small amounts
3. Resistant to deterioration
4. Homogenous - Greshan’s Law (same kind)
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5. Difficult to counterfeit - confidence its real
Interest Rates:
-Nominal interest rates can NEVER be below 0, they have a 0 bound
-Real interest rates CAN be below 0
-When inflation goes up, nominal interest also goes up
1770 = Beginning of Money
1778 = Continental Currency
1861 = Interest in unifying the currency
1862 = First $1 bill of U.S. (tender note)
(confederacy had their own money)
1953 = money wasn’t backed by anything else anymore (FIAT) and had
green seals
First 5 types of money in circulation:
Greenbacks with Blue - backed by silver
Goldbacks with Gold - backed by gold
Read Seals with Red - special
National Bank Notes
Federal Reserve Bank
Money Definitions:
FIAT Money - Government tells us the money is valuable although there
is nothing that it can be redeemed for
Commodity Money - gold and silver (unsuitable for large transactions
and heavy)
Representative Money - paper money, but it represents the commodity
Money Illusion - idea of society adapting this irrationality about money.
We covet money because its exchangeable
M1 - how much paper money is being circulated, credit cards, checkable
deposits, travelers checks
M2 - anything in M1 + small time deposits, small saving deposits,
personal MMMF
Fractional Reserve Banking - Banks are only required to hold a fraction of
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