Money Supply And Banking Flashcards
What is money, and what primary functions does it serve?
Money is a universally accepted medium of exchange, serving as a medium of exchange, unit of account, store of value, and standard of deferred payment.
Example sentence: Money allows individuals to easily trade goods and services.
Why is money as a medium of exchange more efficient than barter?
It eliminates the need for a ‘double coincidence of wants,’ facilitating trade in specialized economies.
Additional information: Barter requires both parties to want what the other has, making transactions more difficult.
What does it mean for money to be a unit of account?
Money provides a standard measure of value, allowing for easy comparison of the value of different goods and services.
Example sentence: Prices are listed in a common currency for easy comparison.
How does money function as a store of value?
Money holds value over time, unlike perishable goods, enabling wealth storage.
Additional information: Savings accounts allow individuals to store money for future use.
What is the role of money as a standard of deferred payment?
Money allows for credit transactions, enabling payments to be made in the future.
Additional information: Loans and mortgages are examples of payments made in the future.
What are the desirable qualities of money?
Acceptable, scarce, portable, divisible, and durable.
Additional information: Bitcoin is a digital currency that possesses some of these qualities.
Define ‘near money’ and ‘liquidity.’
Near money refers to assets easily converted to cash. Liquidity is the ease with which an asset can be converted to cash.
Example sentence: Treasury bills are considered near money.
What is the difference between narrow money (M1) and broad money (M2, M3)?
Narrow money includes physical currency and demand deposits, while broad money includes narrow money plus savings accounts and other assets.
Additional information: M3 is the broadest measure of money supply.
How do Monetarists view inflation, and what is the Quantity Theory of Money?
Monetarists believe inflation is caused by excessive money supply growth. The Quantity Theory of Money (MV = PT) links money supply with inflation.
Additional information: Monetarists advocate for controlling money supply to manage inflation.
How do Keynesians differ from Monetarists in their economic views?
Keynesians argue for active government intervention and emphasize the importance of fiscal policy in managing the economy, particularly during recessions.
Additional information: Keynesian economics gained popularity during the Great Depression.
What are the primary functions of commercial banks?
Accepting deposits and providing loans and advances.
Example sentence: Banks offer various financial services to individuals and businesses.
What are secondary functions of commercial banks?
Investment, credit creation, and foreign trade management.
Additional information: Banks play a crucial role in facilitating international trade.
How do changes in commercial bank lending affect the money supply?
Increased lending by commercial banks expands the money supply.
Additional information: Lower interest rates can lead to higher borrowing and increased money supply.
What are open market operations (OMO) and their purpose?
OMO involves the central bank buying or selling government bonds to control the money supply.
Additional information: OMO is a key tool used by central banks to influence interest rates.
What is quantitative easing (QE) and when is it used?
QE is a policy where the central bank purchases financial assets to inject money into the economy, typically used when interest rates are near zero.
Additional information: QE aims to stimulate economic activity during periods of low growth.
