Money Flashcards
What is money?
Any generally accepted means of payment for delivery of products or settlement of debt
What are the functions of money?
Medium of exchange, unit of account and store of value
What helps to fulfill the functions of money in the UK?
Notes, coins and bank deposits
What is money stock/money supply?
The quantity of money circulation in the economy
What is broad money?
Cash in circulation + retail bank and building society deposits + wholesale bank and building society deposits (UK money supply)
What is narrow money?
Cash in circulation
What is financial intermediary?
Institute that specialises in the bringing lenders and borrowers together
How does the bank create money?
By making loans and creating deposits that are not fully backed by cash reserves
What is the main way a bank makes profit?
By taking deposits at lower interest rates and lending at higher interest rates
What does the bank balance sheet show?
The liabilities and assets of a bank
What are the financial institutions in the UK?
Central bank (Bank of England), retail banks, wholesale banks, building societies, discount houses and finance houses
What is a central bank?
A country’s bank that acts as a banker to the commercial banks and is responsible for setting the interest rates
What is the central bank in the UK?
Bank of England
What is the central bank in the US?
The Federal Reserve System
What is the central bank in the Eurozone?
European Central Bank
What are the key functions of the Bank of England?
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
What is money demand?
Also called liquidity preference, it is downward sloping
What are the motives for holding money?
Transaction, precautionary and speculative
What is money supply?
An assumption that there is only one interest rate
What is nominal money supply controlled by?
The central bank
What is real money supply?
Nominal money supply / price level
What are the controlling methods of money supply?
Requesting that banks keep higher reserves and open market operations
What is money market?
Equilibrium where money demand = money supply and is brought about by changes in the interest rate
What happens if there is an increase in money supply?
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
What is the quantity theory of money?
MV = PT
What is the M in the quantity theory of money?
Quantity of money (money supply)
What is the V in the quantity theory of money?
Velocity of circulation
What is the P in the quantity theory of money?
Average price level
What is the T in the quantity theory of money?
Number of transactions
What happens if V and T are constant?
An increase in M will lead to an increase in P
