CHAPTER 1: AN OVERVIEW OF MONEY AND FINANCE

Question 1

Functions of Money

Answer 1

1. Medium of exchange: this function is what distinguishes money from other assets (eg: stocks, bonds, and houses)
2. Unit of Account
3. Store of Value

Question 2

Medium of Exchange

Answer 2

A medium of exchange must:
- be easily standardized
- be widely accepted
- be divisible
- be easy to carry
- not deteriorate quickly
-> medium of exchange: eliminates the trouble of finding a double coincidence of needs ( reduces transaction costs) and promotes specialization

Question 3

Unit of Account

Answer 3

• used to measure value in the economy
• reduces transaction costs

Question 4

Store of Value

Answer 4

• used to save purchasing power over time
• other assets also serve this function

Question 5

Liquidity

Answer 5

liquid asset: it can be converted in to cash easily, quickly, at no cost

Question 6

Evolution of the Payment System

Answer 6

Commodity money -> Fiat money -> cheques -> E-Money

Question 7

Commodity money

Answer 7

valuable, easily standardized and divisible commodities (e.g. precious metals, cigarettes).
(-): heavy, easily stolen, expensive to transport is there are large amounts

Question 8

Fiat money

Answer 8

paper money decreed by governments as legal tender (meaning that legally it must be accepted as payment for debts)
(+) lighter than coins or precious metal
(-) easily stolen, expensive to transport is there are large amounts, printing must be advanced to avoid counterfeiting, there must be some trust in the authorities who issue it

Question 9

Cheques (or Checks)

Answer 9

an instruction to your bank to transfer money from your account
(+) reduces the transportation costs, improves economic efficiency, can be written for any amount
up to the balance in the account
(-) takes time to get cheques from one place to another, paper shuffling required to process cheques is costly

Question 10

E-Money

Answer 10

• debit card: enable customers to purchase goods and services = electronically transferring funds directly from their bank accounts to a merchant’s account
• credit card: give you access to a line of credit issued by a bank, while debit cards deduct money directly from your bank account

Question 11

Measuring Money

Answer 11

• Construct monetary aggregates using the concept of liquidity:
  + M1 (most liquid assets) = currency + traveler’s checks + demand deposits + other checkable deposits
  + M2 (adds to M1 other assets that are not so liquid) = M1 + small denomination time deposits + savings deposits and money market deposit accounts (MMDA) + money market mutual fund shares.
  + M3 = M2 + large time deposits + institutional money market funds + short-term repurchase agreements (repo) and larger liquid assets
  (Note: trong slide ko gioi thieu dn M3 nen mn chu y M1, M2 thui)
  Photo:
  https://docs.google.com/document/d/1L440KYz-lQ8JEIp_wRPFmIL1cMdc0zLbWWv033vBwU8/edit?usp=sharing

Question 12

Money aggregates

Answer 12

broad categories that measure the money supply in an economy

Question 13

Money

Answer 13

• anything that is generally accepted in payment for good or services or in the repayment of debts (Frederic S. Mishkin)
• money is different from:
  + currency/cash: paper notes + coins
  + wealth: the total collection of pieces of property that serve to store value
  + income: flow of earnings per unit of time ( a flow concept)