Money And Banking

Question 1

What is money

Answer 1

Something that is generally accepted and serves as a medium of exchange

Question 2

What is exchange value

Answer 2

It refers to what money can buy
Depends on the prices of goods and services

Question 3

What is the quantity theory of money

Answer 3

When the amount of money increases, ceteris paribus, prices will rise and therefore the value of money will decline

Question 4

What is the velocity of circulation of money

Answer 4

The rate at which money circulates

Question 5

What is stabilising the value of money

Answer 5

Consumers and producers find it very difficult if the value of money changes in big leaps because it leads to uncertainty

Question 6

What is the relationship between the value of money and prices

Answer 6

It implies that when the value of money, ceteris paribus, is expressed by the prices of goods and services. If prices rise, the value of money declines and vice versa. It is an inverse relationship

Question 7

What is the measurement of the value of money

Answer 7

Measures the value of money by looking in the real economy at how the prices change over time

Question 8

What does CPI measure

Answer 8

The change in the average price of goods and services purchased by a typical urban household

Question 9

What is inflation

Answer 9

A continuous increase in the general price level over a specific period
CPI shows inflation

Question 10

What are the 4 functions of money

Answer 10

Medium of exchange
Bearer of value
Unit of account
Standard of deferred payment

Question 11

What is the principle of credit creation

Answer 11

When an accountholder deposits money into their bank account, the bank’s money assets increase, however the bank’s liabilities increase by the same amount

Question 12

What are interest rates

Answer 12

The price that borrowers must pay for the use of cash that is not their own
The income that a lender receives for deferring consumption

Question 13

What is the repo rate

Answer 13

The rate at which the central bank of a country lends money to commercial banks in the event of any shortfall of funds. Used to control inflation

Question 14

What is a prime interest rate

Answer 14

The interest rate that commercial banks charge their most creditworthy customers, generally large corporations

Question 15

What is a fixed interest rate

Answer 15

An unchanging rate charged on a liability, such as a loan or mortgage

Question 16

What are variable interest rates

Answer 16

An interest rate on a loan or security that fluctuates over time because it is based on an underlying benchmark interest rate or index that changes periodically

Question 17

What do micro-lenders do

Answer 17

Lend money over short periods and ask very high interest rates

Question 18

Who regulates micro lenders and protects borrowers

Answer 18

The Micro-Finance Regulatory Council

Question 19

What is the primary function of the SARB

Answer 19

Protect the value of the currency (Rand)

Question 20

What are the basic functions of the SARB

Answer 20

Bank of issue
Government’s banker
Custodian of gold and other foreign reserves
Banker of other banks

Question 21

Read through page 73

Answer 21

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Question 22

What is the definition of monetary policy

Answer 22

Consists of decisions made by the monetary authorities to influence the interest rates and the supply of money in the economy

Question 23

What are the 4 monetary policy instruments

Answer 23

Interest rate changes
Open market transactions
Cash reserve requirements
Moral suasion

Question 24

Read through monetary policy instruments page 74

Answer 24

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Question 25

What are the 5 reasons for bank failures and explain

Answer 25

Credit risk - Doubt of the bank’s ability to repay deposits
Liquidity risk - If a large depositor withdraws his money with rumours of a liquidity squeeze, it will encourage other depositors to do the same
Interest rate risk - If interest rates change and banks are not prepared, it can cause problems
Investment risk - Banks invest funds into properties, if interest rates rise, there is a decrease in the market value of properties and banks lose money
Capital Risk - Banks must maintain capital and undistributed profit reserves

Question 26

What are the 2 consequences of bank failures

Answer 26

Depositors - Bank will stop repaying deposits when it runs out of cash
Shareholders - Shareholders come last to recover proceeds from a bank failure, board will attempt to sell bank as a going concern when there are signs of problems