Money And Inflation Part 1

Question 1

Money definition

Answer 1

Stock of assets used to carry out transactions

Question 2

3 functions of money

Answer 2

Medium of exchange
Store of value
Unit of account

Question 3

Money supply

Answer 3

Amount of money circulating in an economy.

Question 4

How are different measures of money recognised

Answer 4

M0, M1, M2 etc

Question 5

How is money stock separates

Answer 5

Narrow money-M0 M1 can be easily converted into currency
Broad money-M2+ as M increases, less liquid

Question 6

Liquidity

Answer 6

The ease to which an asset can be converted into cash

Question 7

Monetary policy

Answer 7

Use of money supply and interest rates to influence the economy

Question 8

Central bank functions (3)

Answer 8

Issue bank notes
Provide liquidity for distressed banks
Ensure stabilitY

Question 9

Commercial bank functions (2)

Answer 9

Channel funds from depositors to borrowers (households/firms)
Maturity transformation

Question 10

Maturity transformation

Answer 10

Borrowers borrow for a longtime whereas savers want to access money at short notice.

Question 11

How to find overall price level (P)

Answer 11

GDP deflator
CPI

Question 12

GDP deflator formula and what is it based on

Answer 12

Nominal GDP/Real GDP x 100

Based on production

Question 13

Nominal GDP vs Real GDP

Answer 13

Value of goods and services in terms of current prices (without inflation adjusted)

Value of goods and services in terms of constant prices (inflation adjusted-prices of a base period)

Question 14

CPI formula and what its based on

Answer 14

CPI in month ‘t’ = E(expenditure) in t / E in b (base period)

Based on consumption of households.

(Expenditure is the total cost of spending on the fixed basket of goods)

Question 15

Deflator vs CPI
Why CPI is better (2)

Answer 15

CPI is better for finding cost of living, to assess impact to households.

Also for deflator, some of what is produced (GDP) is exported and bought from abroad, so if those items change in price it does not impact domestic households (directly at least)

Question 16

Differences between CPI and deflator (3)

Answer 16

Quantity varies every period for deflator, quantity is fixed in CPI

Capital goods (goods used for production) are not included in CPI (as not bought by households)

Prices of imports are excluded from deflator as not domestically part of GDP