Money

Question 1

What is money?

Answer 1

Any generally accepted means of payment for delivery of products or settlement of debt

Question 2

What are the functions of money?

Answer 2

Medium of exchange, unit of account and store of value

Question 3

What helps to fulfill the functions of money in the UK?

Answer 3

Notes, coins and bank deposits

Question 4

What is money stock/money supply?

Answer 4

The quantity of money circulation in the economy

Question 5

What is broad money?

Answer 5

Cash in circulation + retail bank and building society deposits + wholesale bank and building society deposits (UK money supply)

Question 6

What is narrow money?

Answer 6

Cash in circulation

Question 7

What is financial intermediary?

Answer 7

Institute that specialises in the bringing lenders and borrowers together

Question 8

How does the bank create money?

Answer 8

By making loans and creating deposits that are not fully backed by cash reserves

Question 9

What is the main way a bank makes profit?

Answer 9

By taking deposits at lower interest rates and lending at higher interest rates

Question 10

What does the bank balance sheet show?

Answer 10

The liabilities and assets of a bank

Question 11

What are the financial institutions in the UK?

Answer 11

Central bank (Bank of England), retail banks, wholesale banks, building societies, discount houses and finance houses

Question 12

What is a central bank?

Answer 12

A country’s bank that acts as a banker to the commercial banks and is responsible for setting the interest rates

Question 13

What is the central bank in the UK?

Answer 13

Bank of England

Question 14

What is the central bank in the US?

Answer 14

The Federal Reserve System

Question 15

What is the central bank in the Eurozone?

Answer 15

European Central Bank

Question 16

What are the key functions of the Bank of England?

Answer 16

It issues coins and bank-notes, banker to the banking system and to the government, lender of last resort and operates the governments monetary policy

Question 17

What is money demand?

Answer 17

Also called liquidity preference, it is downward sloping

Question 18

What are the motives for holding money?

Answer 18

Transaction, precautionary and speculative

Question 19

What is money supply?

Answer 19

An assumption that there is only one interest rate

Question 20

What is nominal money supply controlled by?

Answer 20

The central bank

Question 21

What is real money supply?

Answer 21

Nominal money supply / price level

Question 22

What are the controlling methods of money supply?

Answer 22

Requesting that banks keep higher reserves and open market operations

Question 23

What is money market?

Answer 23

Equilibrium where money demand = money supply and is brought about by changes in the interest rate

Question 24

What happens if there is an increase in money supply?

Answer 24

Decrease in interest rates, increase in C + I + M, lower interest rates increases AD and the effect of these changes on prices depend on the elasticity of AS

Question 25

What is the quantity theory of money?

Answer 25

MV = PT

Question 26

What is the M in the quantity theory of money?

Answer 26

Quantity of money (money supply)

Question 27

What is the V in the quantity theory of money?

Answer 27

Velocity of circulation

Question 28

What is the P in the quantity theory of money?

Answer 28

Average price level

Question 29

What is the T in the quantity theory of money?

Answer 29

Number of transactions

Question 30

What happens if V and T are constant?

Answer 30

An increase in M will lead to an increase in P