Chapter 12 Money And Intrest Rates Flashcards
Define money
Acts as medium of exchange
Is a store of value
Is used as a unit of account
Anything that does these is considered as money
Barter system
Is an economic system without money.
It requires double coincidence:
Two people must be in the same place at the same time with what the other ones to receive in trade.
Commodity money
Commodity money is money valued for what it is made from.
Fiat money
Fiat money is made money by order of the government.
In the modern world, Albany is some form of ————-
Fiat money
What does a currency board do?
A currency board combines Fiat and commodity money by using the money of one country, say the United States, to act as the back up for another currency.
When does Dollarization occur.
Dollarization occurs When a country stops producing their own money and uses the US dollar instead.
When does free banking occur
Free banking occurs when banks and other institutions are allowed to print their own money.
Three attributes of a good money
Hard to counterfeit
easy to carry and use
durable
M1
Is the sum of all liquid forms of money.
That is the things in M1 are easy to spend in an instant.
Example cash, checks, ATM and debit cards
M2
Is the sum of M1,savings accounts and small time deposits and some money market deposits.
M2 will be larger than M1, and much of it is less liquid.
Time deposits
Often called Certificates of Deposit or CD’s are deposits made with an agreement that they will be left in the bank for a period of time.
Small time deposits
Small in the governments definition is anything below $100,000
The nominal interest rate is the
Money rate of interest.
The real rate of interest is the
Nominal rate minus the rate of inflation.
Money supply is tied to
Interest rates
When the money supply is increased,
Interest rates fall
When the money supply is decreasing,
Interest rates will rise
Medium of exchange
-A medium of exchange is an intermediary instrument used to facilitate the sale, purchase or trade of goods between parties.
For an instrument to function as a medium of exchange, it must represent a standard of value accepted by all parties.
In modern economies, the medium of exchange is currency.
Unit of account
-The nominal value of something to count it
Store of value
-Money retains much of its value over a long period of time
Liquid
-How easily something can be sold
Real interest rate
-Nominal interest -inflation = real interest rate
Nominal interest rate
-The money rate of interest
Inflation premium
-Interest rates contain an inflation premium to cancel out the effects of inflation on the loan repayment.
As a loan is paid back during inflation, it is paid using dollars that have less and less value.
The interest rate is therefore increased to compensate
Risk premium
-The risk premium is an additional payment made to compensate for the chance the borrower will not pay back the loan.