Chapter 6: Money

Question 1

Finance

Answer 1

Providing the funds used for investment

Question 2

Money

Answer 2

What is used to pay for goods and services

Question 3

Physical capital

Answer 3

Tools, instruments, machines and other items that are used to produce goods and services

Question 4

Financial capital

Answer 4

Funds that firms use to buy physical capital

Question 5

Gross investment

Answer 5

Total amount spent on purchase of new capital and on replacing depreciated capital

Question 6

Depreciation

Answer 6

Decrease in quantity of capital that results from wear and tear and obsolescence

Question 7

Net investment

Answer 7

Change in the quantity of capital

Question 8

Wealth

Answer 8

The stock of assets held by a person at a single point in time

Question 9

Income

Answer 9

Money received by a person over some period of time

Question 10

Saving

Answer 10

Amount of income not paid in taxes or spent on consumption

Question 11

Financial capital markets

Answer 11

Transform saving and wealth into investment and capital

Question 12

Bond

Answer 12

A promise to make specified payments on specified dates

Question 13

Stock

Answer 13

A certificate of ownership and a claim on the firms profit

Question 14

Loan markets

Answer 14

Businesses and households obtain loans from banks

Question 15

Liquidity

Answer 15

Refers to how easy it is to buy and sell shares of a security without affecting the assets price

Question 16

Volatility

Answer 16

A statistical measure of the dispersion of returns for a given security or market index

Question 17

Financial institutions

Answer 17

A firm that borrows and lends in different markets

-Banks, pension funds, insurance companies

Question 18

Net worth

Answer 18

Total market value of what a financial institution has lent minus the market value of what it has borrowed

Question 19

Effects of new worth

Answer 19

• Positive: solvent

- Negative: insolvent

Question 20

Illiquidity

Answer 20

A firm with no available physical cash.

There can be illiquidity but solvency

Question 21

Relationship between price of assets and interest rate

Answer 21

• If price rises, interest rate falls

- If price falls, interest rate rises

Question 22

Functions of money

Answer 22

• Medium of exchange
• Unit of account
• Store of value

Question 23

Money as a medium of exchange

Answer 23

An object generally accepted in exchange for goods and services. It eliminates the need for barter

Question 24

Money as a unit of account

Answer 24

An agreed measure for stating prices of goods and services

Question 25

Money as a store of value

Answer 25

It can be held and exchanged later fpr goods and services

Question 26

Bitcoins defects as money

Answer 26

- Not a medium of exchange - Not a unit of account - Not a store of value

Question 27

Depository institutions

Answer 27

A firm that takes deposits from households and firms and makes loans to other households and firms

Question 28

Types of depository institutions

Answer 28

- Commercial banks - Thrift institutions - Money market mutual funds

Question 29

Commercial banks as depository institutions

Answer 29

A firm that is licensed to receive deposits and make loans

Question 30

Assets in which banks transform deposits

Answer 30

- Cash assets - Securities - Loans

Question 31

Money market mutual funds as depository institutions

Answer 31

A fund that sells shares and holds liquid assets

Question 32

Benefits of depository institutions

Answer 32

- Create liquidity - Pool risk - Lower the cost of borrowing - Lowers the cost of monitoring borrowers

Question 33

How much money is their in the economy

Answer 33

Deposits+currency

Question 34

What’s desired reserve ratio?

Answer 34

Ratio of banks reserves by total deposits that a bank plans to hold

Question 35

Reserve requirement ratio

Answer 35

The minimum amount of reserves that must be held by a a bank

Question 36

Real money

Answer 36

The quantity of money measured in constant dollars and equals miney divided by price level

Question 37

Nominal interest rate

Answer 37

The opportunity cost of holding money. Increase in nominam interest rate decreases the quantity of real money demanded

Question 38

Quantity of money people want to hold depends on:

Answer 38

- Nominal interest rate - Real GDP - Financial innovation

Question 39

Money market equilibrium

Answer 39

Occurs when the quentity of money demanded equals the quantity of money supplied

Question 40

Who determined the quantity of money supplied?

Answer 40

European Central Bank