Lecture 4 stuff to work on

Question 1

What is commodity money?

Answer 1

This is a good whose value serves as the value of money. Gold coins are an example of commodity money. Commodity money has been generally replaced with fiat money.

Question 2

What is fiat money?

Answer 2

This is a good, the value of which is less than the value it represents as money.
e.g. their value as slips of printed paper is less than their value as money.

Question 3

What are the four functions of money?

1. medium of __________
2. a measure of the __________ or unit of _________ or ________ of ___________
3. store of ________
4. standard of _________ ________

Answer 3

1. medium of exchange
2. a measure of the value or unit of account or means of valuation
3. store of value
4. standard of deferred payment

Question 4

What are 6 characteristics of money that are used to carry out its functions?

Answer 4

• portability
• divisibility
• durability
• uniformity
• limited supply
• acceptability

Question 5

What are the three measures of money supply?

Answer 5

M1
M2
M3

Question 6

What does M1 include?

Answer 6

includes cash and checking deposits

Question 7

What does M2 include?

all elements of _________ as well as “________ money” - M1 includes cash and checking deposits, while ________ money refers to _______ deposits, money market __________, mutual _______ and other _________ deposits

Answer 7

all elements of M1 as well as “near money” - M1 includes cash and checking deposits, while near money refers to savings deposits, money market securities, mutual funds and other time deposits

Question 8

What does M3 include?

a measure of the money supply that includes ________ as well as large time _________, institutional _______ market _______, ________ term repurchase _________ and larger liquid ________.

Answer 8

a measure of the money supply that includes M2 as well as large time deposits, institutional money market funds, short-term repurchase agreements and larger liquid assets.

Question 9

What does the theory of liquidity preference say?

Answer 9

The interest rate adjusts to balance the supply and demand for money.

Question 10

The equilibrium of money supply and demand determines what?

Answer 10

The nominal interest rate

Question 11

Why is MD sloping downwards?

Answer 11

Because it is the opportunity cost of holding money

Question 12

Why is the MS vertical?

Answer 12

It is independent of the interest rate

Question 13

What are four factors affecting the demand for money?

Answer 13

• level of income
• interest rates
• inflation
• uncertainty about the future

Question 14

What are three motives for demanding money? Explain these

Answer 14

• the transactions motive: need to have money to do transactions
• the precautionary motive: want to have money for unexpected expenses
• the speculative motive: hiding money is less risky than investing it

Question 15

Money Demand is dependent on both the ______ ________ and __________ GDP which together comprise the _________ GDP

Answer 15

price level
real
nominal

Question 16

What are the three main mechanisms for influencing the money supply?

Answer 16

Open-market operations

Reserve ratio requirements

Discount rates

Question 17

What is the reserve requirement ratio?

Answer 17

This is the portion of deposits that banks must have on hand as cash set by the reserve bank

Question 18

What is the reserve requirement ratio?

Answer 18

This is the portion of deposits that banks must have on hand as cash set by the reserve bank

Question 19

Increasing the required reserve ratio, ___________ the amount of cash banks are required to hold in reserves, __________ the availability of loans.
This _________ the money supply but also works to __________ inflation.

Answer 19

increasing
decreasing
decreases
decrease