Money Inflation Flashcards
Money doesn’t give you value why?
Value comes from something that is real - something that gives us utility
Where does value come from
It comes from the production process - the marginal product
What is inflation?
is the change in the value of money – number of units of money we
exchange for goods
When money falls you have inflation
Moneys Functions: Medium of exchange
we use it to buy stuff – forms of exchange determine
demand for money
Moneys Functions: Store of value
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
Moneys Functions: Unit of Account
a common unit by which everyone measures prices and values
– house and apples cannot be compared that is why you need money
What is the money supply
is the quantity of money available in the economy
What monetary policy
s the control of money – this is controlled by the central bank
Central bank only produces _____
currency
M1 is?
Currency (C) plus demand deposits, travelers checks and other checkable deposits
M2 is M1 +?
small-time deposits, savings deposits, money market mutual funds,
money market deposit accounts
M3 is M2+?
bank to bank money and money that comes from overseas converted to NZ dollar
Currency ends up being only ___ of the total money in the economy
10%
Money supply =
M = C + D
Reserves are what?
Is the portion that banks do not lend – commercial banks cannot print their
own money – they can only re-issue someone else’s money
Banks Liabilities are?
are deposits because they have to pay interest on it – and loans are
their assets as they can earn interest
Fractional-reserve banking
– forcing banks to hold a certain percentage in
reserves
Bank capital is?
the resources bank owners has put into the bank
The reserve bank gives banks interest based on the ______ - 0.25% - but if they lend,
they get a much _____
OCR, higher interest
Leverage ratio =
assets/capital – higher leverage signals higher risk because you
cannot convert your assets into money as fast
Higher OCR means?
higher reserves and the lower the money multiplier
Monetary Base = ?
B = C + R(reserves)
Reserve ratio =?
rr = R/D
Currency Deposit Ratio =?
cr = C/D
The money multiplier is
M = m x B
Discount Rate is?
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%
Deflation will encourage people to ___ their money because goods will be ____
in the future – that will lead to more ____
hold, cheaper, deflation
If you cannot sell
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
Quantitive easing
central bank buys long-term government bonds at 0 interest and
lend from that
Velocity is nominal GDP as a proxy of transactions
V = P x Y/M
Quantity theory of Money
it assumes velocity is constant
Ø This means that money supply determines the nominal GDP
Real GDP is determined by the?
production function
π = ∆P/P
which is the inflation rate
The real interest rate is
r = i – π
The amount of interest rate demanded is the amount that will?
offset the loss of
value from inflation
Real interest is the additional goods and services you gain in return of ?
Postponing
your consumption
MV = PY
ives the value of money – this is the Quantity Theory
Price Level is equal to
MV/Real Income (Y) assuming velocity is constant
Fisher equation connects
nominal and real interest rate
Real interest rate –
is the additional value you expect to get in relation to what you
are saving
Fisher effect only
works in a free market
higher interest rate
means a lower velocity
