Chapter 2 Flashcards
Is an item or commodity that is generally accepted as a means of payment of goods and services or for payment of debt, and that serves as an asset to its holder
Money
an economic unit that functions as a generally recognized medium of exchange for transactional purposes in an economy
Money
Function of Money:
It is accepted freely in exchange for all other goods
Medium of Exchange
Function of Money
acts as a common measure of value; it is a unit of account and a standard of measurement
Measure of Value
Function of Money
money is a convenient form to store wealth
Store of Value
Function of Money
barter system is very inconvenient so the introduction of money has got over the difficulty of barter
Medium of Exchange
Function of Money
it forms the basis for credit transactions
Standard of Deferred Payment
Is the total value of money available in an economy at a point of time
Money Supply
It includes all coins and paper money issued by the government and the banks
Currency
Four key measures for the Money Supply
M1. The narrow Measure
M2. Intermediate Measure
M3. Broad Measure
M4. (L) Broadest Measure
Key Measure
It includes all currency in circulation, traveler’s checks, demand deposits at commercial banks held by the public and other checkable deposits
M1. Narrow Measure
Key Measure
It refers primarily to money used as a store of value
M2. Intermediate Measure
Key Measure
Includes everything in M2 as well as large time deposits, balances in institutional money market funds, and term repurchase agreements
M3. Broad Measure
Key Measure
In addition to everything in M3, this includes liquid and near liquid assets.
M4. (L) Broadest Measure
In monetary economics, it is the desired holding of financial assets in the form of money, that is, cash or bank deposits rather than investments
The Demand for Money
3 several factor of Demand Money
Level of income
Interest Rates and Inflation
Uncertainty about the future
People prefer to be liquid for day-to-day expenses. The amount of liquidity desired depends on the level of income, the higher the income, the more money is required for increased spending.
Transaction Demand
Is the demand for liquidity to cover unforeseen expenditure such as an accident or health emergency. The demand for this type of money increases as the income level increases
Precautionary demand
The demand to take advantage of future changes in the interest rate or bond prices
Speculative Demand
The lower the rate of interest, the lower this demand for money and vice versa
Speculative Demand
This theory states that money supply and price level in an economy are in direct proportion to one another
Quantity Theory
It is the mathematical expression of the quantity theory of money
The Equation of Exchange
The Equation of Exchange
M x V = P x Y
The cost of using money
Interest
Money paid regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt
Interest
It is the amount a lender charges for the use of assets expressed as a percentage of the principal
Interest Rates
It is the interest rate that is earned at a bank or credit union from savings account or certificate of deposit.
Annual Percentage Yield (APY)
2 main sources of funds
Cost of Equity
Cost of Loans
The rate at which the quantity of money demanded is equal to the quantity of money supplied
Equilibrium Interest Rates
Refers to the interest rate before taking inflation into account
Nominal Interest Rate
Is the rate of interest an investor, saver, or lender receives after allowing for inflation
Real Interest Rate
The compensation, over and above inflation, that a lender demands to lend his money
Pure Interest or Real Interest
Change in the level of prices
Inflation
The compensation that a lender receives for investing funds in something that is difficult to sell
Liquidity RIsk
The risk that the loan or bond won’t be repaid as scheduled, or not at all
Credit Risk
