AP Macroeconomics Flashcards: Definition Measurement And Functions Of Money

What this deck covers

This deck focuses on Definition Measurement And Functions Of Money, giving you a quick way to review the definitions, rules, and examples that matter most for AP Macroeconomics.

How to use these flashcards

Work through these flashcards in short sessions. Try to answer each prompt before flipping the card, then revisit any cards you miss until the explanation feels automatic.

Flashcard 1: What is the classical dichotomy?

Answer: Theoretical separation of real and nominal variables in the economy. Money affects nominal but not real economic variables.

Flashcard 2: What are reserve requirements?

Answer: Minimum reserves a bank must hold against deposits. Higher requirements reduce lending; lower requirements increase it.

Flashcard 3: What is fiat money?

Answer: Currency without intrinsic value, established by government decree. Backed by government authority, not physical commodities.

Flashcard 4: Define commodity money.

Answer: Money that has intrinsic value, such as gold or silver. Value comes from the material itself, not government backing.

Flashcard 5: What is the real interest rate?

Answer: Nominal interest rate minus inflation rate. Shows the true purchasing power of borrowed money.

Flashcard 6: What is a liquidity trap?

Answer: Situation where monetary policy is ineffective due to low interest rates. Occurs when interest rates approach zero percent.

Flashcard 7: What is a liquidity trap?

Answer: Situation where monetary policy is ineffective due to low interest rates. Occurs when interest rates approach zero percent.

Flashcard 8: What is the money supply?

Answer: Total amount of monetary assets available in an economy. Controlled by central banks to influence economic activity.

Flashcard 9: What is representative money?

Answer: Money that represents a claim on a commodity, like a gold certificate. Can be exchanged for the underlying commodity it represents.

Flashcard 10: Identify the role of money as a standard of deferred payment.

Answer: Facilitates transactions over time, enabling credit and loans. Money allows payments to be made in the future.

Flashcard 11: Define the unit of account function of money.

Answer: Standard numerical unit for pricing goods and services. Allows comparison of relative values across different items.

Flashcard 12: What does 'legal tender' mean?

Answer: Currency that must be accepted if offered in payment of a debt. Law requires acceptance for debt payment obligations.

Flashcard 13: Define the discount rate.

Answer: Interest rate at which banks borrow short-term funds from the Federal Reserve. Higher rates discourage borrowing; lower rates encourage it.

Flashcard 14: What is Gresham's law?

Answer: Bad money drives out good money when both are legal tender. People hoard valuable money and spend less valuable money.

Flashcard 15: List the components of M2 in the money supply.

Answer: M1 plus savings deposits, small time deposits, money market funds. Broader measure including less liquid but accessible funds.

Flashcard 16: Define monetary neutrality.

Answer: Concept that changes in money supply only affect nominal variables. Money changes don't affect real economic activity long-term.

Flashcard 17: What is the primary disadvantage of barter?

Answer: Requires a double coincidence of wants. Both parties must want what the other offers.

Flashcard 18: Identify the three primary functions of money.

Answer: Medium of exchange, unit of account, store of value. These functions make money useful in modern economies.

Flashcard 19: Identify a key feature of electronic money.

Answer: Stored electronically, facilitates transactions via digital platforms. Includes digital currencies, credit cards, and mobile payments.

Flashcard 20: What is the Fisher equation?

Answer: $i = r + \text{inflation rate}$, where $i$ is nominal interest rate, $r$ is real rate. Links nominal and real interest rates through inflation.

Flashcard 21: What is deflation?

Answer: Sustained decrease in the general price level of goods and services. Opposite of inflation; prices generally fall over time.

Flashcard 22: Define liquidity in the context of money.

Answer: Ease with which an asset can be converted into cash. Cash is perfectly liquid; other assets vary in liquidity.

Flashcard 23: What is the main consequence of inflation?

Answer: Erodes purchasing power of money. Same amount of money buys fewer goods and services.

Flashcard 24: What is the medium of exchange function of money?

Answer: Facilitates transactions by eliminating the need for barter. Avoids the inefficiency of trading goods directly.

Flashcard 25: What is an open market operation?

Answer: Buying or selling government securities to influence money supply. Primary tool for implementing monetary policy decisions.

Flashcard 26: What does the Federal Reserve use to control the money supply?

Answer: Open market operations, discount rate, reserve requirements. These are the Fed's three main monetary policy tools.

Flashcard 27: What is the money supply?

Answer: Total amount of monetary assets available in an economy. Controlled by central banks to influence economic activity.

Flashcard 28: What is Gresham's law?

Answer: Bad money drives out good money when both are legal tender. People hoard valuable money and spend less valuable money.

Flashcard 29: What is the velocity of money?

Answer: Rate at which money circulates in the economy. Higher velocity means money changes hands more frequently.

Flashcard 30: What is the money multiplier?

Answer: Ratio of the amount of money created by lending to the reserve ratio. Calculated as $\frac{1}{\text{reserve ratio}}$.

Flashcard 31: Define monetary neutrality.

Answer: Concept that changes in money supply only affect nominal variables. Money changes don't affect real economic activity long-term.

Flashcard 32: What is the classical dichotomy?

Answer: Theoretical separation of real and nominal variables in the economy. Money affects nominal but not real economic variables.

Flashcard 33: What is quantitative easing?

Answer: Central bank buys securities to increase money supply and encourage lending. Used when traditional monetary policy becomes ineffective.

Flashcard 34: What does the store of value function of money entail?

Answer: Preserves wealth for future use, retaining value over time. Money maintains purchasing power across time periods.

Flashcard 35: What is the definition of money in economics?

Answer: Money is any item accepted as payment for goods and services. Must be widely accepted and trusted by society.

Flashcard 36: Identify the three primary functions of money.

Answer: Medium of exchange, unit of account, store of value. These functions make money useful in modern economies.

Flashcard 37: What is hyperinflation?

Answer: Extremely rapid and high inflation, eroding currency's value. Often caused by excessive money printing by governments.

Flashcard 38: What does the Federal Reserve use to control the money supply?

Answer: Open market operations, discount rate, reserve requirements. These are the Fed's three main monetary policy tools.

Flashcard 39: Define the unit of account function of money.

Answer: Standard numerical unit for pricing goods and services. Allows comparison of relative values across different items.

Flashcard 40: Define the term 'currency debasement'.

Answer: Reducing the value of currency by lowering its metal content. Historical practice that reduced currency's intrinsic worth.

Flashcard 41: What is seigniorage?

Answer: Revenue earned by the government from issuing currency. Government profits from the difference between face value and production cost.

Flashcard 42: What is the money multiplier?

Answer: Ratio of the amount of money created by lending to the reserve ratio. Calculated as $\frac{1}{\text{reserve ratio}}$.

Flashcard 43: What is deflation?

Answer: Sustained decrease in the general price level of goods and services. Opposite of inflation; prices generally fall over time.

Flashcard 44: What is fiat money?

Answer: Currency without intrinsic value, established by government decree. Backed by government authority, not physical commodities.

Flashcard 45: What is the medium of exchange function of money?

Answer: Facilitates transactions by eliminating the need for barter. Avoids the inefficiency of trading goods directly.

Flashcard 46: What is the purpose of a central bank?

Answer: Manage monetary policy, stabilize the currency, act as lender of last resort. Provides stability and oversight for the financial system.

Flashcard 47: What does M1 include in the money supply?

Answer: Currency, demand deposits, traveler's checks, other checkable deposits. Most liquid forms of money readily available for spending.

Flashcard 48: What is an open market operation?

Answer: Buying or selling government securities to influence money supply. Primary tool for implementing monetary policy decisions.

Flashcard 49: Identify the role of money as a standard of deferred payment.

Answer: Facilitates transactions over time, enabling credit and loans. Money allows payments to be made in the future.

Flashcard 50: What is the primary disadvantage of barter?

Answer: Requires a double coincidence of wants. Both parties must want what the other offers.

Flashcard 51: What is the equation of exchange?

Answer: MV = PQ, where M is money supply, V is velocity, P is price level, Q is output. Shows relationship between money, prices, and economic output.

Flashcard 52: Define commodity money.

Answer: Money that has intrinsic value, such as gold or silver. Value comes from the material itself, not government backing.

Flashcard 53: Define the discount rate.

Answer: Interest rate at which banks borrow short-term funds from the Federal Reserve. Higher rates discourage borrowing; lower rates encourage it.

Flashcard 54: What is the purpose of a central bank?

Answer: Manage monetary policy, stabilize the currency, act as lender of last resort. Provides stability and oversight for the financial system.

Flashcard 55: Identify a key feature of electronic money.

Answer: Stored electronically, facilitates transactions via digital platforms. Includes digital currencies, credit cards, and mobile payments.

Flashcard 56: What does M1 include in the money supply?

Answer: Currency, demand deposits, traveler's checks, other checkable deposits. Most liquid forms of money readily available for spending.

Flashcard 57: What is the definition of money in economics?

Answer: Money is any item accepted as payment for goods and services. Must be widely accepted and trusted by society.

Flashcard 58: What is the real interest rate?

Answer: Nominal interest rate minus inflation rate. Shows the true purchasing power of borrowed money.

Flashcard 59: List the components of M2 in the money supply.

Answer: M1 plus savings deposits, small time deposits, money market funds. Broader measure including less liquid but accessible funds.

Flashcard 60: What is the main consequence of inflation?

Answer: Erodes purchasing power of money. Same amount of money buys fewer goods and services.

Flashcard 61: What is the monetary base?

Answer: Sum of currency in circulation and reserves held by banks. Foundation upon which the broader money supply is built.

Flashcard 62: Define the term 'currency debasement'.

Answer: Reducing the value of currency by lowering its metal content. Historical practice that reduced currency's intrinsic worth.

Flashcard 63: What are reserve requirements?

Answer: Minimum reserves a bank must hold against deposits. Higher requirements reduce lending; lower requirements increase it.

Flashcard 64: What is the monetary base?

Answer: Sum of currency in circulation and reserves held by banks. Foundation upon which the broader money supply is built.

Flashcard 65: Define liquidity in the context of money.

Answer: Ease with which an asset can be converted into cash. Cash is perfectly liquid; other assets vary in liquidity.

Flashcard 66: What is seigniorage?

Answer: Revenue earned by the government from issuing currency. Government profits from the difference between face value and production cost.

Flashcard 67: What does the store of value function of money entail?

Answer: Preserves wealth for future use, retaining value over time. Money maintains purchasing power across time periods.

Flashcard 68: What is representative money?

Answer: Money that represents a claim on a commodity, like a gold certificate. Can be exchanged for the underlying commodity it represents.

Flashcard 69: Define nominal interest rate.

Answer: Interest rate not adjusted for inflation. The actual rate stated on loans and investments.

Flashcard 70: What is the equation of exchange?

Answer: MV = PQ, where M is money supply, V is velocity, P is price level, Q is output. Shows relationship between money, prices, and economic output.

Flashcard 71: What is the velocity of money?

Answer: Rate at which money circulates in the economy. Higher velocity means money changes hands more frequently.

Flashcard 72: What does 'legal tender' mean?

Answer: Currency that must be accepted if offered in payment of a debt. Law requires acceptance for debt payment obligations.