Money Inflation

Question 1

Money doesn’t give you value why?

Answer 1

Value comes from something that is real - something that gives us utility

Question 2

Where does value come from

Answer 2

It comes from the production process - the marginal product

Question 3

What is inflation?

Answer 3

is the change in the value of money – number of units of money we
exchange for goods

When money falls you have inflation

Question 4

Moneys Functions: Medium of exchange

Answer 4

we use it to buy stuff – forms of exchange determine
demand for money

Question 5

Moneys Functions: Store of value

Answer 5

transfers purchasing power from the present to the future – you
keep it to use it in the future for gain or loss depending on inflation

Question 6

Moneys Functions: Unit of Account

Answer 6

a common unit by which everyone measures prices and values
– house and apples cannot be compared that is why you need money

Question 7

What is the money supply

Answer 7

is the quantity of money available in the economy

Question 8

What monetary policy

Answer 8

s the control of money – this is controlled by the central bank

Question 9

Central bank only produces _____

Answer 9

currency

Question 10

M1 is?

Answer 10

Currency (C) plus demand deposits, travelers checks and other checkable deposits

Question 11

M2 is M1 +?

Answer 11

small-time deposits, savings deposits, money market mutual funds,
money market deposit accounts

Question 12

M3 is M2+?

Answer 12

bank to bank money and money that comes from overseas converted to NZ dollar

Question 13

Currency ends up being only ___ of the total money in the economy

Answer 13

10%

Question 14

Money supply =

Answer 14

M = C + D

Question 15

Reserves are what?

Answer 15

Is the portion that banks do not lend – commercial banks cannot print their
own money – they can only re-issue someone else’s money

Question 16

Banks Liabilities are?

Answer 16

are deposits because they have to pay interest on it – and loans are
their assets as they can earn interest

Question 17

Fractional-reserve banking

Answer 17

– forcing banks to hold a certain percentage in
reserves

Question 18

Bank capital is?

Answer 18

the resources bank owners has put into the bank

Question 19

The reserve bank gives banks interest based on the ______ - 0.25% - but if they lend,
they get a much _____

Answer 19

OCR, higher interest

Question 20

Leverage ratio =

Answer 20

assets/capital – higher leverage signals higher risk because you
cannot convert your assets into money as fast

Question 21

Higher OCR means?

Answer 21

higher reserves and the lower the money multiplier

Question 22

Monetary Base = ?

Answer 22

B = C + R(reserves)

Question 23

Reserve ratio =?

Answer 23

rr = R/D

Question 24

Currency Deposit Ratio =?

Answer 24

cr = C/D

Question 25

The money multiplier is

Answer 25

M = m x B

Question 26

Discount Rate is?

Answer 26

the rate the central bank charges to the commercial banks – they
can borrow as much as they want from the reserves as long as they pay OCR + 0.25%

Question 27

Deflation will encourage people to ___ their money because goods will be ____
in the future – that will lead to more ____

Answer 27

hold, cheaper, deflation

Question 28

If you cannot sell

Answer 28

hat will mean that labour income and capital income will fall in
the long-run – and so real wages fall – this will lead to increased unemployment

Question 29

Quantitive easing

Answer 29

central bank buys long-term government bonds at 0 interest and
lend from that

Question 30

Velocity is nominal GDP as a proxy of transactions

Answer 30

V = P x Y/M

Question 31

Quantity theory of Money

Answer 31

it assumes velocity is constant
Ø This means that money supply determines the nominal GDP

Question 32

Real GDP is determined by the?

Answer 32

production function

Question 33

π = ∆P/P

Answer 33

which is the inflation rate

Question 34

The real interest rate is

Answer 34

r = i – π

Question 35

The amount of interest rate demanded is the amount that will?

Answer 35

offset the loss of
value from inflation

Question 36

Real interest is the additional goods and services you gain in return of ?

Answer 36

Postponing
your consumption

Question 37

MV = PY

Answer 37

ives the value of money – this is the Quantity Theory

Question 38

Price Level is equal to

Answer 38

MV/Real Income (Y) assuming velocity is constant

Question 39

Fisher equation connects

Answer 39

nominal and real interest rate

Question 40

Real interest rate –

Answer 40

is the additional value you expect to get in relation to what you
are saving

Question 41

Fisher effect only

Answer 41

works in a free market

Question 42

higher interest rate

Answer 42

means a lower velocity