Chapter 3

Question 1

what is the broad definition of money?

Answer 1

Anything generally accepted as payment for goods and services or in the repayment of debt

Question 2

Define wealth and its variable type

Answer 2

total collection of pieces of property that serve to store value

stock variable

Question 3

Define income and its variable

Answer 3

flow of earnings per unit time

flow variable

Question 4

What are the functions of money?

Answer 4

Medium of exchange
- Promotes economic efficiency by minimising time spent exchanging goods and services.
- Must be easily standardised, widely accepted, divisible
- Must be easy to carry, doesn’t deteriorate

Unit of account
- used to measure value, quote prices in the economy

store of value
-used to transfer purchasing power in then future, the most liquid of all assets but loses value during inflation

Question 5

List the evolution of payment systems

Answer 5

Commodity money - valuable, easily standardised, divisible commodities (i.e. precious metals)

Fiat money - paper money decreed by governments as legal tender

Checks - an instrument to your bank to transfer from your account

electronic payment

E-Money - debut card, stored-value card, E-Cash

Question 6

What is liquidity?

Answer 6

How quickly an asset can be turned into a means of payment

Question 7

List the liquidity spectrum in descending order of liquidity?

Answer 7

Currency, cash
Checking account (demand and deposits)
Savings accounts
Government bonds
corporate bonds, stocks
Real estate, art

Question 8

What is included within M1?

Answer 8

Currency, Traveller’s checks, demand deposits, other checkable deposits

Question 9

What is included within M2?

Answer 9

M1, small denomination time deposits, savings deposits and money market deposit accounts, Money market mutual fund shares (retail)