Money (Financial Markets & Regulation)

Question 1

Why was money introduced?

Answer 1

To remove the barter system (where to exchange goods there had to be a double coincidence of wants).

Question 2

What are the 4 functions of money?

Answer 2

• Unit of account.
• Deferred payment.
• Medium of exchange.
• Store of value.

Question 3

What are the characteristics of money?

Answer 3

• Portable
• Divisible
• Acceptable
• Durable
• Difficult to counterfeit
• Limited in supply

Question 4

What does liquidity mean?

Answer 4

The ease at which an asset can be converted into cash without the loss of value.

Question 5

What is the money supply?

Answer 5

The total amount of money circulating through the economy at a given period of time, e.g. cash and bank deposits.

Question 6

What are the money aggregates?

Answer 6

• M0: Cash + Bank reserves.
• M1: Cash, Bank reserves + Sight deposits.
• M3: Cash, Bank reserves, Sight + Retail deposits.
• M3: Cash, BRs, Sight, Retail + Time deposits.
• M4: Cash, BRs, Sight, Retail, Time deposits + Assets that mature <5 years.

Question 7

What is narrow money?

Answer 7

The narrowest form of money circulating in the economy at any one time - made up of M0 and maybe M1 (M1 is becoming more narrow due to the increased availability of bank cards, etc). Highly Liquid.

Question 8

What is broad money?

Answer 8

Broad money = larger definition of money circulating in the economy at one time. They can be liquidated but we may be waiting 5 plus years for it to do so (M4).