Midterm Topic 11

Question 1

liquidity

Answer 1

ease at which any asset is converted into a medium of exchange.

two aspects: access (how easy it is to obtain and pay with) and acceptance (how much do people want it?)

Question 2

money

Answer 2

asset [stock variable]

any asset that can be used for purchases

Question 3

functions of money

Answer 3

1. unit of account (measures the value of goods and services in a general, comparable unit, i.e. calculating real and nominal GDP)
2. medium of exchange (easier exchange and lower transaction costs with money than with barter, which requires a double coincidence of wants or additional barter trades)
3. store of value (depository of purchasing power over time)

Question 4

Money supply

Answer 4

sum of cash in public hands and in bank deposits (M1 as highly liquid and M2 as less liquid, compensation in form of interest)

Question 5

Monetary base

Answer 5

sum of cash in public hands and the amount in bank reserves (bank deposits that are not loaned by commercial banks to other customers)

Question 6

simplified structure of banking system

Answer 6

1. commercial banks provide loans (bank assets) to borrowers by using resources collected from bank deposits (bank’s liabilities)
2. central bank that acts as a bank for commercial banks and as a regulatory authority of the banking sector

Question 7

interest paid in banking system

Answer 7

compensation for customer holding less liquid monetary assets and allowing the bank to plan with these deposits longer term for its own loan offerings.

Question 8

to remain liquid in the short term, banks…

Answer 8

1. bank reserves which are either minimum requirements by the central bank (to ensure liquidity for the public) or in excess of them
2. get loans from other commercial banks
3. get loans from the central bank

Question 9

money multiplier

Answer 9

the ratio of the money supply to the monetary base.

Expresses the number of dollars of money supply that can be created from each dollar of the monetary base.

Question 10

When RES / DEP < 1

Answer 10

mu (money multiplier) >1. Almost always true, means that banks are lending. Money supply is greater than monetary base.

Question 11

increase in money supply (money creation)

Answer 11

caused by firms and households holding deposits and commercial banks issuing loans using the deposits of their customers. Greater money creation requires commercial banks providing loans.

Question 12

who has influence on the CUR/DEP ratio?

Answer 12

the public (how they hold their monetary assets: CUR and DEP) and central bank (determines CUR)

Question 13

who has influence on the RES/DEP ratio?

Answer 13

central bank (minimum on RES) and commercial banks (how many loans they want to provide, how many extra RES beyond the minimum they want to hold)

Question 14

Funds market: Capital assets vs. financial assets

Answer 14

trade-off between accumulating capital assets through current investment and holding financial assets/liabilities (production income vs. interest income)

higher the real interest rate, the lower the demand for funds and capital assets and the greater the supply of funds and accumulating financial assets.

Question 15

Money market: monetary vs. non-monetary

Answer 15

trade-off is between holding liquidity for economic exchanges and generating future income form production or interest (non-monetary assets)

Question 16

nominal interest rate, i

Answer 16

return on non-monetary assets expresses the opportunity costs of holding money (r + expected inflation)