Chapter 12 Money And Intrest Rates

Question 1

Define money

Answer 1

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

Question 2

Barter system

Answer 2

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.

Question 3

Commodity money

Answer 3

Commodity money is money valued for what it is made from.

Question 4

Fiat money

Answer 4

Fiat money is made money by order of the government.

Question 5

In the modern world, Albany is some form of ————-

Answer 5

Fiat money

Question 6

What does a currency board do?

Answer 6

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.

Question 7

When does Dollarization occur.

Answer 7

Dollarization occurs When a country stops producing their own money and uses the US dollar instead.

Question 8

When does free banking occur

Answer 8

Free banking occurs when banks and other institutions are allowed to print their own money.

Question 9

Three attributes of a good money

Answer 9

Hard to counterfeit
easy to carry and use
durable

Question 10

M1

Answer 10

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

Question 11

M2

Answer 11

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.

Question 12

Time deposits

Answer 12

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.

Question 13

Small time deposits

Answer 13

Small in the governments definition is anything below $100,000

Question 14

The nominal interest rate is the

Answer 14

Money rate of interest.

Question 15

The real rate of interest is the

Answer 15

Nominal rate minus the rate of inflation.

Question 16

Money supply is tied to

Answer 16

Interest rates

Question 17

When the money supply is increased,

Answer 17

Interest rates fall

Question 18

When the money supply is decreasing,

Answer 18

Interest rates will rise

Question 19

Medium of exchange

Answer 19

-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.

Question 20

Unit of account

Answer 20

-The nominal value of something to count it

Question 21

Store of value

Answer 21

-Money retains much of its value over a long period of time

Question 22

Liquid

Answer 22

-How easily something can be sold

Question 23

Real interest rate

Answer 23

-Nominal interest -inflation = real interest rate

Question 24

Nominal interest rate

Answer 24

-The money rate of interest

Question 25

Inflation premium

Answer 25

-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

Question 26

Risk premium

Answer 26

-The risk premium is an additional payment made to compensate for the chance the borrower will not pay back the loan.