Unit 10: Week 1 Flashcards
What is money?
A medium exchange used to purchase goods and services
What is the function of money?
Store value; unit of account and medium of exchange
- it allows purchasing power to be transferred among people, everyone else must trust that others will accept your money as payment. Bank money is a legal tender and must be accepted when purchasing an item.
Why is money important?
- Barter economy, has to be double co-incidence of wants for it to work
- Money serves as intermediary for the exchange process. Money functions as a medium of exchange.
Wealth vs Income
+ examples
Wealth -Stock of things owned or value of that stock.
= Buildings, Land, Machinery, Capital, Debt
Income - Amount of money one receives over some period of time (flow)
= Market earnings, investments, government.
What is: Depreciation
Net Income
Earnings
Savings
InvestmentDepreciation - Reduction in he vale of a stock of wealth over time
Net Income - Maximum amount that one could consume without running down wealth = gross income - depreciation
Earnings - Wages, Salaries, and other income from labour.
Savings - Income that is not consumed Y = C + S, S = Y - C
Investment - Expenditure on newly produced capital goods.
What is the central bank?
The only bank that can create legal tender.
Owned by the government
Acts as the banker for commercial banks
The South African Reserve bank
- regulates depository institutions and controls the quantity of money
- established in 1920, started operating in 1921
- independent of government
Objectives of the SARB
- To achieve an maintain price stability in the interest of balanced and sustainable economic growth in South Africa.
Also:
- Formulating and implementing monetary policy
- Ensuring a sound money, banking and financial system
- assisting in implementing macro policy
- informing the public about M policy and the economic situation
Uses an inflation targeting framework
Repayment =
Principal + interest
Principal * (1 + r)
Interest rate =
[Repayment/principal] - 1
Pure Impatience
This is a characteristic of a person who values an additional unit of consumption now over an additional unit later, when the amount of consumption is the same now and later. It arises when a person is impatient to consume more now because she places less value on consumption in the future for reasons of myopia, weakness of will, or for other reasons.
Myopia and Prudence
Myopia (short-sightedness): People experience the present satisfaction of hunger or some other desire more strongly than they imagine the same satisfaction at a future date.
Prudence: People know that they may not be around in the future, and so choosing present consumption may be a good idea.
What is the discount rate?
The slope of the indifference -1
Measures how much Julia values an extra unit of consumption now relative to later.
`What does the probability of lending depend on?
- Cost of borrowing.
- Default rate on the loans they extended to farmers
- interest they set
What is: Base money, bank money and broad money?
Base: Cash held by households, firms and banks.
- Liability to the CB
Bank: Money in the form of bank deposits created by commercial banks when they extend credit to firms and households.
- Liability of commercial banks
Broad: stock of money in circulation. The sum of bank money and base money that is in the hands of the non bank public.
