Monetary System Flashcards
Define Money
Set of Assets in an Economy, used Regularly to buy G+S
- It is a Liquid Asset
What are the 3 main Functions of Money?
- Medium of Exchange
- Unit of Account
- Store of Value
Define Medium of Exchange
Item Buyers give to Sellers in exchange for G+S
Define Unit of Account
Measure of Economic Value
- Represents Value of G+S
- Records Debts
Define Store of Value
Can retain its Purchasing Power
Define Liquidity
Ease an Asset can be Converted into the Economy’s Medium of Exchange
What is the most Liquid Asset?
Money = Medium of Exchange
What is the general relationship between Liquidity + Return
Higher Liquidity –> Lower Return
What are the 2 main Kinds of Money?
Commodity Money + Fiat Money
What is Commodity Money?
Money in the form of a Commodity with Intrinsic Value
- e.g. Gold, Paper Money convertible to Gold on Demand
- Cigarettes + Phone cards in Prison
What is Fiat Money?
Money with NO Intrinsic Value
- Requires people’s Trust- Loses Value without it
- If Trusted– No Gov. necessary- e.g. Bitcoin
What is Money Stock?
Quantity of Money circulating the Economy
- Includes: Paper Bills + Coins in hands of Public + Demand Deposits
Define Demand Deposits?
Balances in Bank accounts Depositors can access on Demand
What are the 2 main measures of Money Stock?
M1 + M2
What is M1?
- Currency in Circulation
- Demand Deposits
- Other checkable deposits
What is M2?
- M1
- Savings Deposits (Short term)
- Money Market Mutual Funds
- Other categories
What do Central Banks regulate?
Fiat Currencies
- e.g. BoE, Fed. Res., ECB