Macroeconomics: Money Market and monetary Policy

Question 1

Definition Money

Answer 1

• medium of exchange (not income or wealth)

- economic good and means of calculation

Question 2

Roles of Money: Medium of Exchange

Answer 2

• before money: Barter and “double coincidence”

- indirect also possible

Question 3

Roles of Money: Economic Good

Answer 3

• other mediums rot, rust or perish
• money maintains purchasing power
• easily transportable, can be exchanged for all goods any time
• money is completely liquid

Question 4

Roles of Money: Economic Calculation

Answer 4

• fixed value per weight (one defined unit)

- efficient to calculate and express value of goods

Question 5

Types of Money

Answer 5

• Commodity Money

- Fiat Money

Question 6

Definition Commodity Money

Answer 6

• valuable resources (commodity) fulfill the functions of money –> becomes equivalent to money
• value comes from resource value and limited by scarcity of resource
• intrinsic value
• e.g. gold coins, sea shells, diamonds

Question 7

Definition Fiat (Token) Money

Answer 7

• fiat = command of sovereign
• value determined by government –> legal instrument
• must be controlled
• real value of fiat money determined by supply and demand

Question 8

Definiton Legal Tender

Answer 8

• denomination of country’s currency –> legal

- checks and postal orders: not legal tenders

Question 9

Definition Currency debasement

Answer 9

Decrease in value of money that occurs when its supply increased rapidly (Geldentwertung). Ensured by government to maintain purchasing power

Question 10

Properties of Money

Answer 10

1) General Acceptability
2) Divisibility (can be divided into smaller parts)
3) Cognizability (to prevent counterfeits)
4) Transportability (coin, paper, credit)
5) Durability (coins and paper instead of food, salt)
6) Standardizability (all unit alike in size, quality, design, weight
7) Stability in Value

Question 11

Properties of Money: General Acceptability

Answer 11

• legal position: money is backed legally
• own value of the commodity: gold and silver had own value
• confidence: cheques, drafts and credit are accepted by the ground of confidence

Question 12

Definition Deposits

Answer 12

• largest source of funds for banks

- money that account holders entrust to bank for safekeeping and use in future transactions

Question 13

Definition Debt

Answer 13

• method to raise capital
• to smooth ups and down in funding needs
• repurchase agreements or Federal Home Loan Bank system

Question 14

Definition Loan

Answer 14

• primary use of funds and way of income earning

- fixed terms and backed by property (purchased property from loan)

Question 15

Different levels of Money Supply

Answer 15

1) transactions money

2) broad money

Question 16

Transactions Money (M1)

Answer 16

• money that can be directly used for transactions
• stock measure (measured at specific point of time) for money supply including all physical money
• contains cash and assets that can be quicky converted to currency (currency outside banks, demand deposits, checks)

Question 17

Broad Money (M2)

Answer 17

• measure of money supply including cash and checking deposits
• includes less liquid assets (saving deposits, funds)
• often more stable than M1, also includes M1