Money, Financial System, And Monetary Policy. Flashcards
Money Fraction Reserve Banking *financial system *deposit creation Central Banking and Monetary Policy *monetary policy *equilibrium in the money market *transmission mechanism of monetary policy
Double coincidence of want
An economic phenomenon where two people have have an item the other party wants
Intrinsic value
intrinsic value or fundamental value is the “true, inherent, and essential value” of an asset independent of its market value.
Flaw of commodity money
It has intrinsic value, meaning that the commodity has value even if it is not used as money
Fiat money
A currency without intrinsic value that has being established as money, often by government regulation
Monetary aggregate
A measure of the amount of money in circulation within a country or economic sector.
Three main functions of money
- A medium of exchange
- A unit of account, to value things and compare value
- As a store of value
Two main categories of monetary aggregates
- Narrow money or M1
- Broad money or M2
and sometimes M2 +
Narrow money or M1
- Paper currency or coins with the public
2. Demand deposit (Checking) accounts.
Demand deposit
is an account with a bank or other financial institutions that allows the depositor to withdraw his or her funds from the account without notice
Broad money or M2
- M1
- Savings account
- Time deposit accounts
Time deposit account
A time deposit or term deposit is an interest-bearing bank deposit with a specified period of maturity.
Foreign Currency Fixed Deposit (FCFD)
Is a time deposit issued by banks to investors who would like to keep foreign currency for future use or hedge against foreign currency fluctuation
Demand for money
Is the demand for real money balances
Real money balances
the real value of the amount of money held by a person, household or firm or the amount in circulation in the economy.
Sources of demand for money
- Transactions demand for money
2. Assess demand for money
Transactions demand for money
This is the need for money to make purchases of goods and services
Transactions demand for money is affected by
- Interest rate, opportunity cost for holding
2. Prices and income
Asset Demand (Da)
Is money kept as a store of value for later use
Financial system
- responsible for linking other markets within the economy (goods markets and factor markets)
- it also links the economic agents within an economy
[T /F] Financial systems are made up of financial intermediaries and financial markets
True
Financial markets
Markets that trade financial instruments such as stocks, bonds, currencies. Eg, Bonds market, stock market, and forex markets.
Financial intermediaries
They are institutions that provide financial services and products. Banks, mutual funds, mortgage buyers, derivative firms.
Role of financial systems
- Mobilizing and allocating resources
- Managing risks within an economy
- Acting as clearing houses
- Transfer of resources across space and time
Asset of commercial banks
- Cash in vault
- Loans
- Securities
- Reserves with central bank
- Investment
Liabilities of commercial bank
- Demand deposit
- Savings account
- Time deposit
Money multiplier
The ratio of the money supply to the monetary base (money in bank vaults and money in circulation); the money multiplier tells us how many additional dollars will be created with each addition to the monetary base.
RRR.
Required Reserve Ratio. Fraction of deposits required by banks to keep as reserves
Monetary Policy
Changes in money supply that influences the level of economic activity
Body in charge of monetary policy in Ghana
Monetary policy committee of the bank of Ghana
Types of monetary policy
- Expansionary monetary policy
2. Contractionary monetary policy
Expansionary monetary policy (loosening)
Refers to increase in money or an expansion in policy interest rate
Policy interest rate
Is an interest rate that the monetary authority (central bank) sets in order to influence the evolution of the main monetary variables in the economy (consumer prices, exchange rate or credit expansion)
[T /F] The policy interest rate determines the rest of the interest rates in the economy
True
Contractionary monetary policy (tightening)
Reduction in money supply or an increase in policy interest rate
How is money supplied
Directly by the central bank through monetary policy
Indirectly by commercial banks (and the public) through the deposit creation process.
Some tools of monetary policy
- Open operation market
- Dicount rate policy
- Reserve requirement policy
Open Market Operations (OMO)
Refers to the sale and purchase of government securities in the open market.
[T /F] Open market purchases are meant to increase money supply
True
[T /F] Open market sales are meant to reduce money supply
True
Discount rate
Interest rate charged when commercial bank borrow from the central banks
[T /F] central banks raise the discount rate to signal tightening of monetary policy
True
[T /F] central banks lower the discount rate to sign loosening of monetary policy
True
[T /F] and increase in RRR signals a tightening of monetary policy and vice versa
True.
Hedge
Is an investment to reduce the risk of adverse price movement in an asset.
Fractional reserves
The practice of keeping a percentage of deposits on hand but loaning out the rest
Reserve requirements
A legal obligation to keep a minimum amount of reserves
Money supply
Is all the currency and other liquid instruments in a country’s economy on the date measured.
