5.1-Money abd Interest rates Flashcards
What is money?
Money is any item or verifiable record that is generally accepted as payment for goods and services.
What are the three main functions of money?
The three main functions of money are medium of exchange, unit of account, and store of value.
True or False: Interest rates are the cost of borrowing money.
True
What is the nominal interest rate?
The nominal interest rate is the stated interest rate on a loan or investment without adjustment for inflation.
Fill in the blank: The _____ interest rate is the interest rate adjusted for inflation.
real
What is the relationship between interest rates and inflation?
Generally, higher interest rates can reduce inflation by making borrowing more expensive.
What does the term ‘monetary policy’ refer to?
Monetary policy refers to the actions taken by a central bank to manage the money supply and interest rates.
What is the role of a central bank?
A central bank regulates the money supply, manages interest rates, and oversees the banking system.
What is the effect of increasing interest rates on consumer spending?
Increasing interest rates typically reduce consumer spending as borrowing costs rise.
Multiple Choice: Which of the following is NOT a type of money? A) Currency B) Bonds C) Stocks D) Gold
C) Stocks
What is the liquidity preference theory?
The liquidity preference theory suggests that people prefer to hold their wealth in liquid forms and that interest rates are determined by the supply and demand for money.
True or False: A decrease in interest rates usually encourages investment.
True
What is the Fisher effect?
The Fisher effect describes the relationship between nominal interest rates, real interest rates, and inflation.
Fill in the blank: The _____ curve illustrates the relationship between the interest rate and the quantity of money demanded.
demand
What happens to bond prices when interest rates rise?
Bond prices typically fall when interest rates rise.
What is the term for the rate at which banks lend to each other overnight?
The interbank lending rate.
Multiple Choice: Which tool can a central bank use to influence interest rates? A) Taxation B) Open market operations C) Regulation D) Subsidies
B) Open market operations
What is quantitative easing?
Quantitative easing is a monetary policy where a central bank purchases government securities to increase the money supply and lower interest rates.
True or False: High interest rates can lead to lower levels of borrowing.
True
What is a ‘zero lower bound’ in interest rates?
The zero lower bound is a situation where nominal interest rates are at or near zero, limiting the effectiveness of monetary policy.
Fill in the blank: The _____ rate is the interest rate set by a central bank for lending to commercial banks.
discount
What is the term for the market where short-term borrowing and lending occurs?
The money market.
What is the primary goal of expansionary monetary policy?
The primary goal of expansionary monetary policy is to stimulate economic growth by lowering interest rates and increasing the money supply.
Multiple Choice: Which of the following is a potential consequence of low interest rates? A) Increased savings B) Higher inflation C) Decreased investment D) Lower consumer confidence
B) Higher inflation
