Money, Banks and Interest Rates

Question 1

3 roles of money

Answer 1

Medium of exchange
Store of value
Unit of account

Question 2

M4

Answer 2

Liquidity (Physical currency and deposits)

Question 3

Narrow money

Answer 3

Money such as notes,coins,deposits easily liquidated into cash

Question 4

Broad money

Answer 4

Total value of money held by individuals and businesses including commercial bank loans

Question 5

MS equation

Answer 5

MS= Monetary base + illiquid assets

Question 6

Monetary base=

Answer 6

Currency + Deposits

Question 7

Bank profit=

Answer 7

Interest rate charged on loans - Interest rate paid on deposits

Question 8

Reserve ratio?

Answer 8

Fraction of reserves held as deposits (required rr is determined by law)

Question 9

Money multiplier equation

Answer 9

(1+currency drain)/(rr+currency drain)

Question 10

Excess reserves=

Answer 10

Actual reserves- Desired reserves

Question 11

Currency drain ratio

Answer 11

Currency held by public/ public deposits in banks

Question 12

With no currency drain 1/rr=

Answer 12

money multiplier

Question 13

Money multiplier=

Answer 13

change in money supply/change in monetary base

Question 14

2 motives for holding money

Answer 14

Transaction demand

Asset demand

Question 15

4 factors affecting money demand

Answer 15

Price level
Interest rate
Real GDP
Financial innovation

Question 16

How PL affects MD

Answer 16

As PL rises so does nominal money demand

Question 17

IR affect on MD

Answer 17

IR= OC of holding money
IR= Cost of money

Question 18

GDP affect on MD

Answer 18

Increased GDP means more consumer expenditure which increases transaction demand

Question 19

Financial innovation affect on MD

Answer 19

Innovation reduces MD by reducing cost of switching between money and assets therefore lowering quantity of money planned to be held