Chap. 9 - Money Flashcards
What are the functions of money?
Money fulfills three primary functions in our economy: It is a medium of exchange, it is a measure of value, and it is a store of value.
What is the medium of exchange mean?
Money is the means by which we purchase goods and services.
What does a measure of value mean?
Money is also a measure of value and acts as a yardstick for measuring the relative worth of heterogeneous goods.
What does store of value mean?
Money is a store of value because it is a liquid (or spendable) source of wealth.
What does M1 consist of?
The first definition of the money supply is called M1. M1 consists of currency and coins in the hands of the non-bank public, traveler’s checks, and checkable deposits.
What does M2 consist of?
The second definition of money, and M2 consists of M1 but also savings deposits, small time deposits, and money market mutual funds.
What are the two types of demand for money?
Transaction Demand and Asset Demand
What is Transaction Demand?
People using money on a daily basis in order to fulfill daily wants and needs.
Describe the graph for the money supply.
On the y axis there is interest rate, on the x axis there is Money. The money supply is a vertical line, fixed/set by the Fed, and the demand for money is a downward sloping curve. As interest rates are higher people will want to have less money, invest more for the higher interest rate, and vice versa.
Describe what happens when the money supply shifts to the left and then to right. Describe what happens when the demand for money shifts to the left and then to the right.
Money Supply Left: Interest Rate rises
Money Supply Right: Interest Rate falls
Demand Left: Interest Rates fall
Demand Right: Interest Rates rise
What are some factors that influence interest rates?
1) Term or Maturity: Shorter terms have higher i, long term have lower i.
2) Risk: More risk have higher i, lower risk has lower i.
3) Liquidity: Liquid loans have lower i, Illiquid loans have higher i.
4) Administrative Costs: higher costs have higher i, lower costs have lower i.
