Introducing Money and Interest Rates Flashcards
What is money? What is it composed of? What does it also include?
Money is any item or commodity that is generally accepted as a means of payment for goods and services or for repayment of debt, and that serves as an asset to its holder. On the simplest level, money is composed of the bills and coins which have been printed or minted by the National Government (these are called currency). But money also includes the funds stored as electronic entries in one’s checking account and savings account.
Why does the financial system work on an entirely fiduciary basis?
Because money in a modern economy is not directly backed by intrinsic value (e.g., the coin’s weight in gold or silver), the financial system works on an entirely fiduciary basis, relying on the public’s confidence in the established forms of monetary exchange.
How does money facilitate transactions?
By giving goods and services an easily measured value, money facilitates the billions of transactions that take place every day.
How were transactions done before money was invented? Compare it with money.
Before its invention, people bartered, swapping goods they produced themselves for things they needed from others. Barter is sufficient for simple transactions, but not when the things traded are of differing values, or not available at the same time.
Money, by contrast, has a recognized uniform value and is widely accepted.
What are those that control a country’s economy?
Today it is the nation’s government and central bank that control a country’s economy.
What is the Federal Reserve?
The Federal Reserve (known as “The Fed”) is the central bank in the US. The Fed issues currency, determines how much of it is in circulation, and decides how much interest it will charge banks to borrow its money.
What is the central bank in the Philippines?
In the Philippines, the central bank that controls the country’s economy is the “Bangko Sentral ng Pilipinas”.
Does money still need to exist as physical coins or notes?
While government still print and guarantee money, in today’s world it no longer needs to exist as physical coins or notes, but can be found solely in digital form.
List the defining characteristics of money.
Money must have the following as a means of exchange:
1. Value
2. Durability
3. Portability
4. Uniformity
5. Divisibility
6. Limited supply
7. Usability
What underlies all the characteristics of money?
Trust
Explain the importance of trust as the underlying factor of all the characteristics of money.
Trust is crucial because people must be confident that if they accept money, it can be used to pay for goods.
How does money act as a STORE OF VALUE?
Money serves as a store of value, allowing people to store wealth for future use. It must be non-perishable and of practical size for easy storage and transportation.
How does money function as an ITEM OF WORTH?
Originally, money often had intrinsic value, like precious metals in coins, which acted as a GUARANTEE for its acceptance. Now it has nominal value.
Explain the concept of money as a MEANS OF EXCHANGE and its importance in facilitating transactions.
Money serves as a means of exchange, enabling the smooth exchange of goods and services. Its value should be stable, and it should be easily divisible, with sufficient denominations to provide change.
What is the role of money as a UNIT OF ACCOUNT, and why is it helpful to have one recognized authority issuing money?
Money functions as a unit of account, allowing individuals and nations to record wealth possessed, traded, or spent. Having one recognized authority issuing money is crucial to maintaining trust in its value.
What would happen if anyone could issue money?
Trust in its stability would diminish.
Define money’s role as a STANDARD OF DEFERRED PAYMENT and explain its significance. What does this function enhance?
It allows for transactions where payment is postponed to a future date. This characteristic enhances the flexibility and efficiency of economic transactions.
Enumerate all the functions of money.
- Store of value
- Unit of account
- Means of exchange
- Item of Worth
- Standard of Deferred Payment
Provide the time when bartering started and ended.
10,000–30,000 BCE
Who is Adam Smith?
Author of The Wealth of the Nations, he was one of those who recognized barter as the precursor to money.
Explain the advantages of barter.
- Trading relationship - Fosters strong links between partners.
- Physical goods are exchanged - Barter does not rely on trust that money will retain its value.
Explain the disadvantages of barter.
- Market needed – Both parties must want what the other offers.
- Hard to establish a set value on items – Two goats may have a certain value to one party one day, but less a week later.
- Goods may not be easily divisible – For example, a living animal cannot be divided.
- Large-scale transactions can be difficult – Transporting one goat is easy, moving 1,000 is not.
When did trade records start appearing?
7000 BCE
Explain coinage. When was it established and until when?
Defined weights of precious metals used by some merchants were later formalized as coins that were usually issued by states (600 BCE-1100CE).
Explain banknotes. When was it invented?
States began to use bank notes, issuing paper IOUS that were traded as currency, and could be exchanged for coins at any time (1100-2000).
List down the ARTIFACTS OF MONEY and explain them briefly.
Barter (5,000 BCE) - Early trade involved directly exchanged items - often perishable ones such as a cow.
Sumerian cuneiform tablets (4,000 BCE) - Scribes recorded transactions on clay tablets, which could also act as receipts.
Cowrie shells (1,000 BCE) - Used as currency across India and the South Pacific, they appeared in many colors and sizes.
Lydian gold coins (600 BCE) - In Lydia, a mixture of gold and silver was formed into disks, or coins, stamped with inscriptions.
Athenian drachma (600 BCE) - The Athenians used silver from Laurion to mint a currency used right across the Greek world.
Han dynasty coin (200 BCE) - Often made of bronze or copper, early Chinese coins had holes punched in their center.
Roman coin (27 BCE)- Bearing the head of the emperor, these coins circulated throughout the Roman Empire
Byzantine coin (700) - Early Byzantine coins were pure gold; later ones also contained metals such as copper.
Why did Economics emerge?
Economics as a discipline emerged, in part to help explain the inflation caused in Europe by the large-scale importation of silver from the newly discovered Americans.
What was the significance of the Great Debasement that occurred from 1542 to 1551 during the reign of England’s Henry VIII?
The Great Debasement was a period during Henry VIII’s reign when the silver penny was debased, reducing its purity to three-quarters copper. This action led to increased inflation as trust in the currency decrease.
What does “debasing” mean?
“Debasing” refers to the act of reducing the value or quality of something, particularly in the context of currency, by reducing the precious metal content or altering its purity.
What significant development occurred with the formation of early joint-stock companies in England in 1553?
In 1553, merchants in England began forming early joint-stock companies, where investors purchased shares (stock) and collectively shared the rewards and risks of business ventures.
What was the purpose behind the establishment of the Bank of England in 1694?
The Bank of England was created to function as an institution capable of raising funds at low interest rates and managing the national debt.
How did Isaac Newton contribute to the monetary system during his tenure as Warden of the Royal Mint in 1696?
As Warden of the Royal Mint in 1696, Isaac Newton argued against debasing currency, emphasizing the importance of maintaining public confidence. Under his leadership, all coins were recalled, and new silver coins were minted to restore trust in the currency.
What does “minting” mean?
“Minting” refers to the process of manufacturing coins, typically carried out by an official institution responsible for producing currency, known as a mint. During minting, metal blanks are stamped with designs, denominations, and other necessary information to create official coins for circulation in an economy.
When was the United States dollar first authorized for issuance by the Continental Congress, and when was the first national currency minted by the US Treasury?
The Continental Congress authorized the issuance of United States dollars in 1775. However, the first national currency was not minted by the US Treasury until 1794.
Explain money’s facilitation of the flow of resources.
Money facilitates the flow of resources in the circular model of macroeconomy. Not enough money will (1) SLOW DOWN the economy, and too much money can cause (2) INFLATION because of higher price levels. Either way, (3) MONITORING the supply and demand for money is (3) VITAL for the economy’s central bank’s monetary policy.
What are the aims of the economy’s central bank’s monetary policies?
Mainly to (1) STABILIZE price levels and to support (2) economic GROWTH.
Define the M1 key measure for the money supply.
The narrowest measure of the money supply. It includes:
- CURRENCY in circulation held by the nonbank public
- DEMAND deposits
- OTHER checkable deposits
- TRAVELER’S checks
M1 refers primarily to money used as a MEDIUM OF EXCHANGE.
Define the M2 key measure for the money supply.
INCLUDING M1, this measure includes the following:
- money held in SAVINGS deposits
- MONEY MARKET deposit accounts
- NON-INSTITUTIONAL money market mutual funds
- other short-term money market assets (e.g.. “overnight” Eurodollars).
M2 refers primarily to money used as a STORE OF VALUE.
What is money market?
Money market basically refers to a section of the financial market where financial instruments with high liquidity and short-term maturities are traded.
What is a time deposit?
A time deposit, also known as a term deposit, is an interest-bearing bank account with a specific maturity date. The money in a time deposit must be held for the fixed term to receive the interest in full.
What are Eurodollars?
Eurodollar, a United States dollar that has been deposited outside the United States, especially in Europe. Foreign banks holding Eurodollars are obligated to pay in U.S. dollars when the deposits are withdrawn.
Define the M3 key measure for the money supply.
INCLUDING M2, this measure includes the financial institutions, (e.g., large-denomination time deposits and term Eurodollars).
M3 refers primarily to money used as a UNIT OF ACCOUNT.
Define the L key measure for the money supply.
INCLUDING M3, this measure includes liquid and near-liquid assets, such as the following:
- short-term Treasury notes
- high-grade commercial paper
- bank acceptance notes
Explain the M1 money supply and its influence to the bank’s ability to extend loans.
The deposits of the public at banks and other depository institutions are considered money and are therefore included in the M1 money supply. If the public withdraws money from bank deposits to hold money as personal currency (“under the mattress”), this increase in inactive money will affect the banks’ ability to extend loans and will influence the supply of money.
Some common forms of public payment may not count as part of the supply of money. What are they?
- Check payments from one person to another are not included in the money supply because a check merely transfers money without being a net addition to the supply of money.
- Consumer credit cards are not included in the money supply; they are considered instant loans to consumers and therefore are not a net addition to the money supply.
Explain the Bangko Sentral ng Pilipinas’ (BSP) role.
The role of the Bangko Sentral ng Pilipinas (BSP) are the following:
1. It is responsible for DETERMINING the supply of money.
2. It uses daily open market operations to influence the CREATION of money by banks and to guide the AVAILABILITY of money in the economy.
3. BSP also has an impact on the creation of money by banks through reserve requirements and the discount rate, that is, the interest rate at which banks can borrow from the BSP as a lender of last resort.
