Money Markets

Question 1

Define Money

Answer 1

Money is anything that is readily accepted in payment for goods or services or in the repayment of debts.

Question 2

What are the 3 roles of money?

Answer 2

1. Medium of exchange
2. Unit of account
   
   1. A measure of the value of goods and services in the economy
3. Store of Value
   
   1. Other assets also serve this function
   2. Money is the most liquid of all assets but loses value due to inflation.

Question 3

Define liquidity

Answer 3

Liquidity is the speed and certainty with which an asset can be converted into money.

• That means that cash is the most liquid and current accounts linked to (android pay, debit cards) are very close behind.
• Savings accounts sometimes require notice of withdrawal so these are less liquid

Question 4

What are the federal reserves definitions of money? (based on liquidity levels of the types)

Answer 4

• MO (Monetary base, outside money, high powered money)

Currency + Deposits of commercial banks at the central banks

These deposits are known as bank reserves

• M1= Currency + Sight Deposits

Sight deposits are holdings in current accounts (offer low/no interest)

This will be our core measure of the stock of liquidity in an economy

• M2= M1 + Time unrestricted savings deposits at banks
• M3= M2 + Time restricted savings deposits at banks, savings at non-bank institutions.

Question 5

What is a bond?

Answer 5

A bond is a promissory note a promise to pay you an amount in exactly one years time.

Question 6

What is the equation to find the interest rate of a bond?

Answer 6

Question 7

What is the demand for money function?

Answer 7

M_d = $YLi

M_d = The demand for money

i = interest rate

L= liquidity

Y= Income

An increase in the interest rate decreases the demand for money as people put more wealth into bonds.