5.1 - money + interest rates

Question 1

Functions of money:
Must be:

Answer 1

• Medium of exchange
• A unit of account
• A store of value
• A standard for deferred payment

Question 2

Characteristics of money

Answer 2

• Acceptable to all
• Portable
• Durable
• Limited
• Divisible
• Difficult to forge
• Stable value

Question 3

Money supply

Answer 3

Total amount of money circulating the economy

Question 4

Narrow Money

Answer 4

Can be used as a medium of exchange

Question 5

Near money

Answer 5

An asset not used as a medium of exchange
Can be converted into money / stores value

Question 6

Broad money

Answer 6

Narrow + near money

Question 7

Money creation in theory

Answer 7

1. Savings lent out to borrowers - loanable funds theory (untrue as stays with firms)
2. Money multiplier approach

Question 8

Money multiplier approach

Answer 8

Banks need to keep a minimum reserve as liquid to repay dispositors

Question 9

Money creation in practise

Answer 9

Banks create broad money by making loans to households and firms
It does not rely on savers - looks for funding by borrowing from other banks after the loan is made

Question 10

Fisher equation

Answer 10

Distinguishes between real + money side of economy

Question 11

Fisher equation equation

Answer 11

MV = PT
M = money in an economy
V = velocity of circulation
P = av price of each transaction in economy
T = tot no. transactions in a time period