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A level Economics - 9708 > 44- Money and Banking > Flashcards

44- Money and Banking Flashcards

Ch- 44

1
Q

Money

A

Money is an item generally accpetable as a means of payment

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2
Q

Explain in detail

4 Functions of Money

A
  • Medium of Exchange - overcome the problem of double coincidence of wants
  • Store of Value - enables people to save
  • Unit of Account - measure of value, prices of diffrent items compared in monetary terms
  • Standarad for deferred payments - borrow and lend. Buy now and pay later
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3
Q

Double coincidence of wants

A

a situtaion where two people each ahve something the other person wants

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4
Q

With example explain

most imporatnt characteristics of Money

A

generally acceptable - people are willing to accpet in exchange of goods.

people in Zimbabwe lost confidence in the Zimbabwean dollar and they had to use $

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5
Q

7 other charcteristics apart from acceptibility

A
  • Portable: can be carried around easily
  • Divisible: can be divided into differnt units of values. ₹10, ₹20, ₹50, ₹100
  • Homogenous/uniform
  • Limited in supply
  • Durable
  • Stable value
  • Not easy to counterfiet
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6
Q

Why is having limited supply important

A

So that money doesn’t lose its value.
Zimbabwe printed a lot of money making it abundant and lose itps value

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7
Q

Money Supply

A

The total amount of money in an economy

Currency in circulation + relevant deposits

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8
Q

Why does the government calculate the money supply

A

Gain information on
- Aggregate demand (AD)
- state of financial market
- and determine the direction of the monetary policy

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9
Q

Limitations of calculating money supply

A

Difficult to decide what to include in the money supply

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10
Q

Two main measures of money supply

A
  • Narrow money –> high liquidity
  • Broad money –> low liquidity
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11
Q

narrow money

A

money that can be spent directly
notes and coins in circulation
medium of exchange

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12
Q

broad money

A

narrow money + other store of value

cash+saving

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13
Q

Quantity theory of money

A

The theory that links inflation in an economy to changes in the money supply.

change in money supply causes euqal percentage change in the price levels, inflataion.

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14
Q

velocity of circulation

A

the number of times money changes hands

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15
Q

Fisher Equation

A

MV=PT

both sides show nominal income

m = money supply
v = velocity of circulation
p = price level
t or y = output/transcation/real GDP

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16
Q

assumptions of the quantity theory of money

A

V and Y are constant and unaffected by the money supply

keynesians appose this belief

An exmaple, when people anticipate that the inflation rates are going to rise they most likely would want to spend their money. Therefore, the velocity of circuation would increase.

17
Q

Volume of transaction

A

nominal GDP,
PY
price* output

18
Q

Differences between Keynesian and Monetaraist theory approach

A
  1. K - Believe in government intervention budget deficit (spending) to incraese AD
  2. M - Gs will only lead to inflation in LR, more stable with a stable money supply
  3. K- employement, M - Inflation key priority
    3.
19
Q

2 primary function of commercial bank

A
  • Accept deposists
  • Give loans
20
Q

Explain the function of a commercial bank

A

Loans :
-Overdraft and loans
Deposits :
- Savings and current/demand deposit account
Government Bonds and equities

21
Q

Demand deposit account

A
  • Where money can be easily withdrawn for purchsaes by the holder

Also known as a current account

22
Q

Savings deposits account

A
  • Interest is received on the savings
    -A notice may be required before withdrawal
23
Q

Overdraft

A
  • A consumer can withdraw more than what they have in their demand deposit accounts
  • Higher interest rates are charged
24
Q

Loans

A

money lent at an agreed rate of interest for a given period of time

25
Q

government securities

A

Bills and bonds issued by the government to raise money

26
Q

3 objectives of a commercial bank

A
  • Profitability
  • Security
  • Liquidity
27
Q

Explain in detail the objective of a commercial bank

Profitability

A

The interest rates they charge on money lent to the customers

28
Q

Explain in detail the objective of a commercial bank

Liquidity

Also explain what is liquidity

A
  • Assets in liquid form are not profitable
  • ## However banks have to have enough money to meet expected withdrawals requests by holders

The ability to turn an asset into cash without loss

29
Q

Security

A

Firms have to keep some of thier profits for
- Some lenders do not repay
- Invested businesses go out of business

This is important to ensure credibility

30
Q

Reserve Ratio

A

the proportion of liquid assets to total liabilities

legal minimum fraction of deposits which the banks are mandate to keep as cash with themselves.

31
Q

Capital ratio

A

Bank’s available financial assets as a percentage of it’s riskier assets

financial assets/ riskier assets

The higher the capital ratio the more unexpected losses can be covered by the bank. Less risk taking and allows survivals during hard times.

32
Q

5 main causes of changes in the Money Supply

A
  • Increase in lending by commercial banks
  • Increse in G finaced by financial central/commercial banks
  • quantitative easing — Selling of givernment bonds to financial institutes
  • More money entering than leaving the eocnomy
33
Q

Money Multiplier

A

1/cash reserve ratio
100/liquidity ratio
value of new assets created/change in liquid assets

34
Q

potential increase in liabilities of a bank

A

credit multiplier * Intial deposits

35
Q

Potential increase in bank lending

A

liabilities - intial amount

36
Q

Assumptions of the credit creation process

A
  • All transaction happen through bank
  • During any given period of time only a few of the customers will need to withdraw cash
  • All customers would not withdraw cash at the same time
37
Q

Why may banks not choose to lend as much as the credit multiplier implies?

A
  • Lack of households/firms who want to borrow
  • Lack of credit worthy borrowers –> will affect their liquidity as the people do not pay back on time
38
Q

commercial bank and credit creation

A
39
Q

Functions of Central Bank

A

A level Economics - 9708 (12 decks)

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