Money Flashcards
What is money?
- Means of payment
- Money as a store Value
- Unit of account
Money as a means of payment
Able to sebtle goods and services, can be valuable or intrinsically useless, facilitaes exchange
- widely used
Money is a store value and when is it useful
Can be stored at low costs, either currency or electronic money
- useful as storage as long as inflation is low
Why are banks good for storing money?
Keeps inflation stable (printing money) and protects purchasing power
Money is a unit of account
Can be exchanged with same unit no exchange risks
Most liquid form of wealth
No need to find a buyer or pay transaction cost ( not always true - houses, assets)
Benefits of money
No need for double coincidence of wants ( barter economy)
A transaction takes place now
What does UK money consist of
Currency
Deposits (bank and building societies)
How the UK measure money
Using the M4
M4 = C + D
C - Currency held by the public (excluding banks)
D - Deposit of customers in UK banks
Negative of M4
Ignores currency held by banks and governments
How is money created
Mostly deposits, Bank of England can’t control this directly
- Depends on banks willingness to give loans, demand from customers/firms
When is money destructed
A bank loan is repaid, this money is extinguished
If more loans are repaid than originated the M4 can fall
What happens when the M4 falls?
Recession
- less loans (expensive + hard to get)
- Show investors they are safe by repaying
What do money markets consist of
- Demand for money by houses and firms (downward sloping)
- Supply of money by BofE and commercial banks
Positives of money creation
Makes financial capital more plentiful
More purchasing power and a higher supply of loanable funds
Possible problems of money creation
Excess money = financial crisis, over inflation, destroys the value of money
e.g Zimbabwe
What is Base money
Cash held by households, firms, banks and balences held by commerical banks in their accounts at CB ( reserves)
What is Bank Money?
Money in the form of bank deposits created by commercial banks when they extend credit
What is Broad money
Sum of Bank money and base money that is in hands of non public bank - Measured by the stock of money in circulation
