Macro - Lecture 1 (Money, Banking and Interest Rates) Flashcards
What are the 3 functions of money?
Medium of Exchange
Unit of Account
Store of Value
What does the “Medium of Exchange” function mean?
Money overcomes the inefficiency of barter systems by facilitating trade between buyers and sellers.
What does the “Unit of Account” function mean?
Prices, assets, and debts are expressed in monetary terms, allowing easy comparison of value.
What does the “Store of Value” function mean?
Money preserves purchasing power for future use, though inflation may erode its value.
What are the types of money?
Commodity Money.
Convertible Money.
Fiat Money.
Digital Money.
What is Commodity Money?
Money that has intrinsic value, such as gold or silver.
What is Convertible Money?
Money that can be exchanged for a fixed quantity of a commodity, such as gold-backed currency.
What is Fiat Money?
Modern currency with no intrinsic value, backed by trust in the government or central bank.
What is Digital Money?
Money in digital form, including cryptocurrencies like Bitcoin, not always regulated by central banks.
What are the roles of central banks?
Issue and regulate currency.
Stabilize inflation and foster growth.
Act as the lender of last resort.
What is the Money Multiplier Effect?
The process where an initial deposit leads to a much larger total money supply due to repeated lending and depositing.
What is the formula for the money multiplier?
Money Multiplier = 1 / Reserve Ratio.
What are the three motives for holding money?
Transactions Motive.
Precautionary Motive.
Speculative Motive.
What is the Transactions Motive?
Holding money to meet day-to-day transaction needs.
What is the Precautionary Motive?
Holding money for unexpected expenses or emergencies.
