Unit 10

Question 1

What is Money?

Answer 1

Money is a medium of exchange consisting of bank notes and bank deposits, or anything else used to purchase g+s.

Question 2

Where does money act as an important role

Answer 2

as a bartering tool, and therefore allows for many more exchanges. Accepted as payment as others can use it for the same purpose.

Question 3

Model in this unit

Answer 3

Consumption now versus later, with feasible frontier sloping downwards, steeper when interest rate is higher

Question 4

How much is repayment?

Answer 4

R = P +Pr
R = P(1+r)
P is the principal payment, R is the repayment, r is the interest rate.

Question 5

Slope of FF

Answer 5

• SLOPE is the MRT = 1+r
• If she goes from 0 now to 1 now, she needs to pay back 1.10 later due to 10% interest rate, which means her consumption later will be 98.9.

Question 6

Indifference curve shape

Answer 6

As we get further to right very shallow, left is very steep on IC, people would generally much prefer a consistent level of consumption, split between both. This is as people have DMR of consumption.

Question 7

Pure impatience

Answer 7

Myopia: People dont think about the future, only focus on the present
Prudence: what if I’m not around later on - consume now YOLO
Will make it so that if they have to take a cut in consume now, need more proportionally later.

Question 8

All captured by a persons discount rate:

Answer 8

how much she values an extra unit of consumption now over an extra unit of consumption later. This is the slope of her IC between consumption now and consumption later minus one.

MRS = 1+P
Depends on
- desire to smooth consumption
- pure impatience

Question 9

desire to smooth consumption

Answer 9

affected by the situation she’s in

Question 10

Pure impatience as a person depends on

Answer 10

subjective discount rate because it is based part on her psychology

Question 11

Will choose point where

Answer 11

MRS = MRT. I.e. 1+p = MRT. 1+P=1+r, so p=r, willingness to trade off consumption now and later on = ability to trade off now and later on.

Question 12

borrowing, lending, storing and investing are ways of

Answer 12

moving goods consumption forward or backwards.

• increase utility by smoothing consumption, or if impatient, move consumption to present
• Can increase consumption in both periods

Question 13

People differ because:

Answer 13

• differences in situation
• Differ in level of pure impatience

Question 14

Balance sheet shows

Answer 14

what owned or owed.

Question 15

Assets and Liabilities

Answer 15

Assets = what you own and what people owe you
Liability = what you owe others.
Assets = net worth + Liability

Question 16

A bank is

Answer 16

firm that makes profits through its lending and borrowing activities.

Question 17

Types of money

Answer 17

Base money
Bank money
Broad money

Question 18

Base money

Answer 18

cash held by households, firms and banks and reserves. Liability of central bank

Question 19

Bank money

Answer 19

money in the form of bank deposit is created by commercial banks when they extend credit. Is the liability of commercial banks

Question 20

Broad money

Answer 20

amount of broad money in economy measure by stock of money in circulation.

Question 21

Loans on a balance sheet

Answer 21

Added to both assets and liabilities as you have to pay it back.

Question 22

Bank makes money as

Answer 22

value of assets including interest minus value of liabilities which is the principal loan allows them to create positive net worth

Question 23

LIQUIDITY RISK

Answer 23

might not be able to supply all of demanded assets, taking time to switch illiquid assets to liquid.

Question 24

DEFAULT RISK

Answer 24

loans not repaid

Question 25

If bank does not have enough base money to fund a loan

Answer 25

may go to central bank or another commercial bank to grab a loan, creating a money market

Question 26

Since central bank controls supply of base money

Answer 26

Can also decide iR.
- intervenes in money market by saying it will lend whatever Q of base money demanded at IR it chooses

Question 27

Insolvent is when

Answer 27

total liabilities more than assets. On the verge of insolvency when A=L
Leverage ratio: assets/net worth = assets/A-L

Question 28

typically borrower needs loan as not have enough money, so

Answer 28

• maybe unable to provide enough equity or collateral to sufficiently reduce risk for lender - so no loan

Called Credit rationing, those with less wealth borrow on worse terms(credit constrained) or are refused (credit excluded)

Question 29

Why engage in these activities

Answer 29

• increase utility by smoothing consumption
• can increase consumption in both cases

Question 30

Person can always expand her consumption possibilities by undertaking an investment project, true or false

Answer 30

False, only if rate of return is greater than interest rate

Question 31

Central vs commercial bank

Answer 31

Central bank does interest rate, commercial can do mortgages

Question 32

If Sarah’s indifference curve is steeper than Abraham’s

Answer 32

• Sarah is more impatient as a person than Abraham.