Money Inflation Flashcards

1
Q

Money doesn’t give you value why?

A

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

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2
Q

Where does value come from

A

It comes from the production process - the marginal product

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3
Q

What is inflation?

A

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

When money falls you have inflation

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4
Q

Moneys Functions: Medium of exchange

A

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

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5
Q

Moneys Functions: Store of value

A

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

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6
Q

Moneys Functions: Unit of Account

A

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

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7
Q

What is the money supply

A

is the quantity of money available in the economy

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8
Q

What monetary policy

A

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

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9
Q

Central bank only produces _____

A

currency

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10
Q

M1 is?

A

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

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11
Q

M2 is M1 +?

A

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

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12
Q

M3 is M2+?

A

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

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13
Q

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

A

10%

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14
Q

Money supply =

A

M = C + D

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15
Q

Reserves are what?

A

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

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16
Q

Banks Liabilities are?

A

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

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17
Q

Fractional-reserve banking

A

– forcing banks to hold a certain percentage in
reserves

18
Q

Bank capital is?

A

the resources bank owners has put into the bank

19
Q

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

A

OCR, higher interest

20
Q

Leverage ratio =

A

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

21
Q

Higher OCR means?

A

higher reserves and the lower the money multiplier

22
Q

Monetary Base = ?

A

B = C + R(reserves)

23
Q

Reserve ratio =?

24
Q

Currency Deposit Ratio =?

25
The money multiplier is
M = m x B
26
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%
27
Deflation will encourage people to ___ their money because goods will be ____ in the future – that will lead to more ____
hold, cheaper, deflation
28
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
29
Quantitive easing
central bank buys long-term government bonds at 0 interest and lend from that
30
Velocity is nominal GDP as a proxy of transactions
V = P x Y/M
31
Quantity theory of Money
it assumes velocity is constant Ø This means that money supply determines the nominal GDP
32
Real GDP is determined by the?
production function
33
π = ∆P/P
which is the inflation rate
34
The real interest rate is
r = i – π
35
The amount of interest rate demanded is the amount that will?
offset the loss of value from inflation
36
Real interest is the additional goods and services you gain in return of ?
Postponing your consumption
37
MV = PY
ives the value of money – this is the Quantity Theory
38
Price Level is equal to
MV/Real Income (Y) assuming velocity is constant
39
Fisher equation connects
nominal and real interest rate
40
Real interest rate –
is the additional value you expect to get in relation to what you are saving
41
Fisher effect only
works in a free market
42
higher interest rate
means a lower velocity