EKN Chapter 10

Question 1

Medium of exchange

Answer 1

Any item sellers generally accept and buyers generally use to pay for a good or service; money; a convenient means of exchange goods and services without engaging in barter.

Question 2

Unit of account

Answer 2

A standard unit in which prices can be stated and the value of goods and services can be compared; one of the three functions of money.

Question 3

Store of value

Answer 3

An asset set aside for future use; one of the three functions of money.

Question 4

Token of money

Answer 4

Money where the face value of notes or coins is unrelated to the value of the material of which they are composed.

Question 5

Transactions and precautionary demand for money

Answer 5

The amount of money people want to hold for use as a medium of exchange (to make payments); varies directly with nominal GDP.

Question 6

Asset demand for money

Answer 6

The amount of money people want to hold as a store of value; this amount varies inversely with the interest rate.

Question 7

Interest

Answer 7

The payment made for the use of money ( of borrowed funds).

Question 8

Total demand for money

Answer 8

The sum of the transactions demand for money and the asset demand for money.

Question 9

Monetary policy

Answer 9

A central bank’s changing of the money supply to influence interest rated and assist the economy in achieving price stability, full employment and economic growth.

Question 10

Open-market operations

Answer 10

The buying and selling of SA government securities by the Reserve Bank for purposes of carrying out monetary policy.

Question 11

Repo rate

Answer 11

The interest rate that the reserve bank charges on the loans it makes to commercial banks.

Question 12

Expansionary monetary policy

Answer 12

Reserve Bank actions to increase the money supply, lower interest rates and expand real GDP; an easy money policy.

Question 13

Prime interest rate

Answer 13

The benchmark interest rate that banks use as a reference point for a wide range of loans to businesses and individuals.

Question 14

Restrictive monetary policy

Answer 14

Reserve bank actions to reduce the money supply; increase interest rated and reduce inflation; a tight money policy.

Question 15

Fractional reserve banking system

Answer 15

A reserve requirement that is less than 100% of the chequable-deposit liabilities of a commercial bank.

Question 16

Monetary multiplier

Answer 16

The multiple of its excess reserves by which the banking system van expand cheque deposits and thus the money supply by making new loans (or buying securities); equal to 1 divided by the reserve requirement.

Question 17

Subprime mortgage loans

Answer 17

A subprime mortgage is one that is normally issued to borrowers with low credit ratings.

Question 18

Mortgage-backed securities

Answer 18

A mortgage-backed security is a type of asset-backed security which is secured by a mortgage or collection of mortgages.