Chapter 3: Microeconomic Decision Makers Flashcards
Functions of Money
Standard of Deferred Payment
Unit of Account
Medium of Exchange
Store of Value
Characteristics of Money
Portability
Acceptability
Divisibility
Scarcity
Stability (of Value)
Durability
Recognisability
Money
Anything that is widely and generally accepted, and exchanged for goods and services.
Double coincidence of wants
The need for both people making a trade to be willing to exchange their good/service for the other’s
Central Bank
The bank responsible for supervising and regulating the banking and financial system in a country.
Functions of a Central Bank
Commercial Bank
A bank that provides a variety of services to households and businesses
Functions of a Commercial Bank
Sole Issuer of Legal Tender: Issues notes and coins of the national currency.
The Government’s Bank: It manages all payments relating to the government.
Manages National Debt: Central banks can issue and repay public debts on the government’s behalf.
The Bankers’ Bank: It supervises and controls all the other banks in the whole economy, even holding their deposits and transferring funds between them.
Lender of Last Resort: When other banks are having financial difficulties, the central bank can lend them money to prevent them from going bankrupt.
It manages the country’s gold and foreign currency reserves. These reserves are used to make international payments and adjust their currency value (adjust the exchange rate).
Supervises Monetary Policy: Controls the supply of money in the economy, and influences the economy through changes in price or quantity of money.
Sets interest rates
Establishes financial rules.
Influences on Spending
Spending on needs is essential.
Changes in disposable income are directly proportional to spending/consumption, as a higher disposable income allows households to spend more.
Changes in base interest rates can have an inverse impact on consumer spending, as higher rates of borrowing make households less likely to do so and consume more.
Consumer confidence is directly proportional to spending, and if consumers are confident about the future of the economy and of their jobs, they will spend more.
Disposable Income
Disposable income is the income of a person after all income-related taxes and charges have been deducted.
Wealth
All of the
Influences on Saving
When disposable income increases, the amount saved depends on the income level of the household. Low-income households will save the least, as any additional income will be utilized on necessities, and some wants. Medium-income households will increase both saving and spending. High-income households increase savings more significantly.
Changes in base interest rates can have a direct impact on consumer saving, as higher rates of saving incentivize households to save more.
Consumer confidence is inversely proportional to saving, as households tend to save more when they fear the future. High consumer confidence will cause the household to spend instead.
Influences on Borrowing
An increase in disposable income increases the borrowing rates of a household, as they can make additional monthly payments. However, while low-income households may find it difficult to get loans, high-income households get preferential treatment and can purchase larger assets.
If interest rates decrease, medium & high-income households may decide to borrow more money from commercial banks, as it is now cheaper to repay.
There will likely be an increase in personal loans (for travel/home improvements/etc). Low-income households are usually unable to access borrowing from commercial banks, even when interest rates fall and so they continue to borrow from sources that charge high-interest rates
When the economy is booming, confidence is high resulting in more borrowing & Consumption
When the economy slows down or stagnates, confidence falls resulting in less borrowing & consumption.
Wage Factors
Financial payments received by the worker for their labour.
Non-Wage Factors
Factors that influence a worker’s choice of occupation that are meaningful to them, but not direct payments.
