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ECO 1011S > UNIT 2: Money and Banking > Flashcards

UNIT 2: Money and Banking Flashcards

1
Q

Functions of money

A
  1. medium of exchange
  2. unit of account
  3. store of value
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2
Q

Fiat money

A
  1. issued and authorized by the government and under government regulation
  2. authoritative money
  3. not backed by any tangible asset
  4. backed by trust and faith in issuing government and trust that others will accept the money as payment
  5. legal tender
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3
Q

Legal tender

A
  1. any item or instrument recognised by law as means to settle debt or meet a financial obligation
  2. almost always national currency
  3. creditor legally obliged to accept
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4
Q

market based vs barter economy

A
  1. money eliminates double coincidence of wants
  2. allows for the transfer of purchasing power
  3. benefit of delaying expenditure
  4. money can be used as a medium of exchange
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5
Q

money as a unit of account

A
  1. common unit measure allows market system to function
  2. allows us to determine how best to spend any income and compare pricing
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6
Q

money as a store of value

A
  1. saving and delaying/reducing current consumption
  2. its advantage is liquidity, disadvantage is potential loss of value
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7
Q

motives for demanding money

A
  1. transactional motive
  2. precautionary motive
  3. speculative motive
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8
Q

transactional motive for demanding money

A
  1. money held in liquid form to cover short-term spending obligations
  2. depends on level of spending in an economy
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9
Q

precautionary motive for demanding money

A
  1. holding money for financial emergencies
  2. depends on interest rate and level of expenditure in the household
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10
Q

speculative motive for demanding money

A
  1. holding money to avoid capital losses in the bond market
  2. at low interest rates households prefer to hold more cash in liquid form
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11
Q

consumption over time and borrowing

A
  1. there is a tradeoff between consuming goods now and later
  2. borrowing allows us to consume more now at the cost of consuming less later
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12
Q

interest rate (r)

A

price/cost of borrowed funds that facillitates the ability to bring buying or purchasing power forward in time

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13
Q

marginal rate of transformation

A
  1. (1+r)
  2. shows tradeoff between current and future consumption
  3. ability to transform goods from the future to the present
  4. to have one more unit now, we need to give up (1+r) units of future consumption (where r is interest rate)
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14
Q

future value

A

product of present value and marginal rate of transformation

FV = PV (1+r)

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15
Q

calculate current consumption

A

current earnings + discounted expected future earnings

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16
Q

calculate future consumption

A

expected future earnings + current earnings adjusted for interest

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17
Q

discont factor

A

1/(1+r)

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18
Q

indifference curve in consumption smoothing

A
  • willing to sacrifice one unit of current consumption for an increasing number of future consumption units
  • marginal benefit of future consumption is decreasing the more future consumption is enjoyed
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19
Q

consumption smoothing

A

balancing out consumption over many periods rather than letting consumption change rapidly

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20
Q

pure impatience

A

an individual values current consumption absolutely more than future consumption

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21
Q

myopia

A

short sighted prioritisation of current satisfaction

22
Q

prudence

A

opposite of myopia; saving for the future wisely

23
Q

MRS and slope of the indifference curve

A

MRS is slope of IC
reflects rate at which we will sacrifice current and future consumption
MRT is the feasibility constraint

24
Q

what is a commercial bank

A

firm that makes profit by lending and borrowing, holds the deposits of households, firms and some govt entities, makes a profit through higher rates on loans than savings

25
Q

monetary base (M0)

A
  1. includes all paper and coin currency in circulation + reserves required by law to be held by the central bank
  2. small component of overall money supply
  3. high powered money as base for expansion of monetary supply through fractional reserve banking
26
Q

fractional reserve banking

A
  1. through excess reserve balances commercial banks provide loans on which they earn interest
  2. this increases excess reserves which can be used to purchase other financial assets
  3. increased reserves also allows banks to provide more loans to expand the money supply
27
Q

M1

A

physical currency + demand deposits + travellers checks and other liquid deposits

28
Q

M2

A

M1 + savings deposits + money market securities, mutual funds and other timed deposits

less liquid than M1, not suitable for exchange but can quickly be converted

29
Q

M3

A

M2 + large-time deposits, institutional money market funds, short-term repurchase agreements, larger liquid assets

incorporates even less liquid assets

30
Q

credit cards and money

A
  1. credit cards not money and dont change money supply
  2. short term loan offered by bank
  3. credit acts like money as a medium of exchange
31
Q

SARB and creating money

A
  1. sole issuer of banknotes and coin
  2. responsible for required reserves
  3. banker for commercial banks
  4. influences money supply by supplying more high powered money particularly by increasing the reserves of banks
  5. as reserves are increased commercial banks are able to provide more loans to households and influence money supply
32
Q

Central bank digital currency

A
  1. electronic rather than physical currency
  2. issued, regulated and backed by central bank
  3. loaded into a digital wallet based on an app in your phone that may be designed or facilitated by the central bank
33
Q

benefits of central bank digital currency

A
  1. more access to financal products
  2. increases financial inclusion to individuals who cannot access bank accounts but can access cheap smartphones
  3. improves safety concerns associated with holding large sums of money
  4. by-pass traditional electronic transactions with their long wait times and fees (involve several steps and patchwork of systems)
34
Q

Objectives of the SARB

A
  1. achieve and maintain price stability in the interest of balanced and sustainable economic growth in south africa
  2. formulate and implement monetary policy
  3. ensure sound money, banking and financial system
  4. inform public on monetary policy, domestic economic conditions, and influence of global markets
35
Q

money demand function

A
  1. represents the inverse relationship between money demand and interest rates
    2.change in nominal interest rate generates a movement along the curve
  2. change in GDP and price level shifts curve (increase up, decrease down)
36
Q

default risk

A

from the borrower not being able to fulfill their financial obligations and pay back their loan

37
Q

liquidity risk

A

loan from bank to borrower is an illiquid asset and there is no guarantee that the bank will access the full amount and be able to use the full ammount to conduct transactions

38
Q

bank run

A

situation when all depositors demand their money all at once, may result in a bank being unable to fulfill its obligations or meet its liabilities

39
Q

repurchase rate

A

rate at which private banks borrow rands from SARB; set by SARB

40
Q

policy interest rate

A

the interest rate set by the central bank

41
Q

prime lending rate

A

benchmark interest rate charged by commercial banks

42
Q

financial markets

A
  1. play an important role in allocating and transferring funds from savers to borrowers
  2. connected with real economy as they provide funds from lenders to borrowers to finance investment expenditure
43
Q

Types of financial markets

A
  1. loan markets
  2. bond markets
  3. stock markets
44
Q

loan markets

A
  1. short and long term finance to consumers and firms
  2. funds new inventory and supplies or household consumption (short term)
  3. funds capital investment in new machinery or buildings or large household purchases (long term)
45
Q

bond markets

A
  1. like loans but cannot be issued by every person/ institution
  2. tradable debt instruments
  3. vulnerable to price changes
46
Q

mortgage backed security

A
  1. bond holder earns income from a package of mortgages
  2. mortgage lenders create mortgage backed securities
  3. then make a mortgage loan to a homebuyer and create an asset that is sold to obtain more funds to make mortgage loans
  4. rate of return generated from interest payments of those who have been provided a mortgage bond and have to make monthly repayments
  5. risky because if many borrowers default the whole system collapses
47
Q

stock markets

A
  1. financial market in which shares/equity of corporations are trades
  2. purchase stocks of a company, then those funds used to finance investment expenditure
48
Q

financial institutions

A
  1. commercial banks
  2. pension funds
  3. insurance companies
49
Q

pension funds

A
  1. use pension contributions, group these together to buy stocks and bonds to generate a return
50
Q

insurance companies

A
  1. allow households and firms to cope with risks
  2. receive premiums and use funds not paid out as claims to buy stocks and bonds to generate a return
  3. in normal times insurance companies have steady flow of funds

ECO 1011S (6 decks)

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