Intro

Question 1

Give 4 frictions that make money essential?

Answer 1

• Lack of double coincidence of wants
• Limited commitment (no contracts)
• imperfect record keeping tech and enforcement
• Anonymity means can’t track borrowers

Question 2

What are the 3 functions of money?

Answer 2

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

Question 3

What is a unit account and why is it important?

Answer 3

• What goods/services are priced in terms of
• Otherwise would have to price goods in terms of each other, which gets very complex.
• it also helps to transmit economic info e.g. demand/inflation

Question 4

What is a medium of exchange?

Answer 4

People hold it because they plan to swap for something in the future (not because of its inherent value)

Question 5

Give 4 advantages of having a medium of exchange

Answer 5

• Avoids double coincidence of wants
• Reduces transaction costs
• Promotes specialization
• Overcomes infeasibility of IOUs

Question 6

Give 7 characteristic of a good medium of exchange

Answer 6

Must be:
1) Easily standardized + verifiable
2) Widely accepted
3) Divisible
4) Not deteriorate quickly
5) Be scarce
6) Have price stability
7) Have transferability (easy to carry)

Question 7

What is a store of value, and what must hold for a currency to be one?

Answer 7

Used to save purchasing power over time

-It has to retain value over time

Question 8

What is the benefit of money being a store of value?

Answer 8

• It enables self-insurance against liquidity shakes
• allows consumption smoothing and provides protection against unexpected expenses.

Question 9

Provide the logic behind co-existence

Answer 9

For multiple assets to co-exist, if perfect substitutes, must have save ROR.

-Therefore, if different RORs co-exist, must have different characteristics.

Question 10

What 3 things determine the market value of a monetary unit?

Answer 10

1) intrinsic value
2) Promise of payment
3) Liquidity premium

Question 11

Give the 6 characteristics of a liquid asset

Answer 11

1) Marketable - Readily + immediately accepted as payment by many
2) Predictable value
3) Reversible - Can get same value when selling immediately after buying
4) Divisible (eg not $1m painting)
5) Transportable (eg not $1m painting)
6) Verifiable/ recognizable

Question 12

What is a system of scarce reserves?

Answer 12

Monetary policy implemented by changing supply of money

Question 13

What is a system of abundant reserves?

Answer 13

Monetary policy implemented through interest rate paid on reserves.