(Done) Day 5: Money

Question 1

Why’s money worth something?

Answer 1

1. Can legally settle debts with it. In particular, debts towards the state (gov’t taxes)
2. there’s trust: you trust that other people will also accept it in the future

Question 2

What’s money backed by now?

Answer 2

“fiat” currency: numbered pieces of green paper

Question 3

what’s fiat currency?

Answer 3

A currency established as money, often by government regulation. No intrinsic value, only transactional value

Question 4

What’re the 3 uses of money in a market economy?

Answer 4

1. Medium of exchange: used and accepted to pay for goods/services
2. Unit of account: used to value goods/services
3. Store of value: retains its value into the future

Question 5

What’re examples of money?

Answer 5

currency, bank accounts, savings accounts, money market accounts, gift cards, bank reserves

Question 6

What’re money market accounts?

Answer 6

commit savings for a period of time to your bank, and the longer you commit the higher your interest rate you get

Question 7

What’s not considered money?

Answer 7

1. stock market accounts

2. credit cards (it’s debt and is the same as taking out a loan, it’s a liability for the borrower)

Question 8

What’s money defined as?

Answer 8

A liability and IOU from a bank to customers/households/firms

Question 9

What’s currency defined as?

Answer 9

liability from a central bank

Question 10

how does money supply decrease in the aggregate?

Answer 10

via money-destruction: when you pay off non-money liabilities (like loans) with money

Question 11

What’s the monetary base?

Answer 11

The amount of money the federal reserve/central bank controls = currency and reserves

Question 12

What’s the main idea for M1-4?

Answer 12

As you go up from M1 to M4, the basic idea is to add more and more illiquid forms of payment.

Question 13

What’s M1?

Answer 13

Currency + demand deposit accounts (eg checking accounts)

Question 14

What’re federal funds?

Answer 14

a bank’s.deposits/reserves held in a Bank’s Federal Reserve account to meet the Fed’s reserve requirement.

Question 15

How can the federal reserve increase the money supply with the reserve requirement?

Answer 15

1. lowering the interest rate on reserves
2. increases the amount of money banks can loan out bc they’d rather get more interest by loaning it than getting reserve interest
3. decreases federal funds rate, which decreases interest rate for general public
4. increases the amount of loans people borrow, which increases the money supply

Question 16

How does the interest rate on reserves affect the amount of money banks loan out?

Answer 16

1. Fed pays banks interest on their reserves
2. Banks want the highest interest rate on their money.
3. decreasing reserve interest rate means less return, so banks give out more loans instead

Question 17

What happens when banks loan you money?

Answer 17

The money leaves their reserve account at the Fed, decreasing the reserve interest banks get.

Question 18

How does money M increase in the aggregate?

Answer 18

LOANS

1. when banks give you loans and you borrow money.
2. money in your bank account increases, while leaving other accounts unchanged
3. the central bank moves the money from the bank’s reserves to the bank’s account for you

Question 19

How do banks create money in the aggregate?

Answer 19

LOANS
When banks give u loans and you borrow money from them, the amount in your account increases, leaving other account balances unchanged

Question 20

What’s the constraint on bank lending money?

Answer 20

Once they give u a loan, the central bank moves the money from that bank’s reserves to the bank’s account

Question 21

What’s the relationship between loans and deposits?

Answer 21

LOANS create deposits