Final Test Review
Econ 102
Definitions:
Barter-trading goods.
Double Coincidence of Wants-you desire a good that another consumer has, and the desire something you have
Monetary Aggregate-
Near Moneys-financial assets that can’t be used directly as medium of exchange, but can be quickly converted into money.
Asymmetric Information-when one party of a deal has information that might affect the transaction, and the other side doesn’t have this information
Adverse Selection-hard to distinguish good borrowers from the bad ones
Moral Hazard-hard to monitor borrowers after they have been loaned money
Bank Runs-depositors lose faith in the bank, try to all withdraw money at once, bank fails.
Short Answer
What are the functions of money?
Medium of exchange, unit of account, store of value
List the variable in the Baumin-Tobil model. What does this model describe?
Money of model demand. Y= total spending. I=interest rate. N=number of trips to bank. F=cost of trips to bank
Who are the usual savers in the banking system? The borrowers?
Households are savers, businesses borrow
What is the difference between the federal funds rate and the discount rate?
Federal funds rate is the interest rate determined in federal funds market.
Discount rate is the rate the Fed charges on loans to banks.
What is the difference between capital and reserve requirements? What are each of these set at in the US?
Capital requirements are that a bank must hold 7% more assets than the value of deposits
Reserve requirements are that a bank must keep at least a 10% reserve ratio
Problem Solving/Long Answer
List the two types of money and describe how they are different and similar. Which is the dominant form of money? What is the benefits of each?
Commodity money-used as medium of exchange and has other uses
Fiat money-value derives directly from its use as money, no intrinsic value
Discuss the liquidity/return tradeoff. What is the main problem?
For higher liquidity you face a lower return and vice versa.
Draw two Lorenz curves, on representing perfect equality and one representing perfect inequality. What would the Gini coefficient be in each of these cases?
Why would two much inequality be harmful to economic growth?
Large numbers of poor, political instability
In class your teacher talked about the median voter, describe why political candidates in which there are two parties will tend to be very similar, that is close to the median.
Evenly distributed voters, politicians want to capture majority of votes.
Example from class. How many trips to the bank should the following consumer make and how much cash on average will he hold on him? He wants to spend 10,000, he makes 40/hr and bank trips take a half hour. The interest rate on his account is 10%.
N*= (iY/2F)^.5
Average money holding= (YF/2i)^.5