Money And Banking Flashcards
What is money
Something that is generally accepted and serves as a medium of exchange
What is exchange value
It refers to what money can buy
Depends on the prices of goods and services
What is the quantity theory of money
When the amount of money increases, ceteris paribus, prices will rise and therefore the value of money will decline
What is the velocity of circulation of money
The rate at which money circulates
What is stabilising the value of money
Consumers and producers find it very difficult if the value of money changes in big leaps because it leads to uncertainty
What is the relationship between the value of money and prices
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
What is the measurement of the value of money
Measures the value of money by looking in the real economy at how the prices change over time
What does CPI measure
The change in the average price of goods and services purchased by a typical urban household
What is inflation
A continuous increase in the general price level over a specific period
CPI shows inflation
What are the 4 functions of money
Medium of exchange
Bearer of value
Unit of account
Standard of deferred payment
What is the principle of credit creation
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
What are interest rates
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
What is the repo rate
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
What is a prime interest rate
The interest rate that commercial banks charge their most creditworthy customers, generally large corporations
What is a fixed interest rate
An unchanging rate charged on a liability, such as a loan or mortgage
What are variable interest rates
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
What do micro-lenders do
Lend money over short periods and ask very high interest rates
Who regulates micro lenders and protects borrowers
The Micro-Finance Regulatory Council
What is the primary function of the SARB
Protect the value of the currency (Rand)
What are the basic functions of the SARB
Bank of issue
Government’s banker
Custodian of gold and other foreign reserves
Banker of other banks
Read through page 73
.
What is the definition of monetary policy
Consists of decisions made by the monetary authorities to influence the interest rates and the supply of money in the economy
What are the 4 monetary policy instruments
Interest rate changes
Open market transactions
Cash reserve requirements
Moral suasion
Read through monetary policy instruments page 74
.
What are the 5 reasons for bank failures and explain
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
What are the 2 consequences of bank failures
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
