Week 1 - Money

Question 1

What is money?

Answer 1

• Medium of exchange between two agents in an economy.
• Used to purchase goods and services
• Store of value.
  – Unit of account for pricing,
• Allows for purchasing power to be transfered.
• E.g. bank notes, cheques, deposits.

Question 2

What are th three types of money over time?

Answer 2

• Fiat - bank notes, which were once receipts for gold. Can no longer be exchanged for other commodities.
• Representative - government produced money backed by a physical commodity, e.g. credit cards
• Commodity - e.g. gold and silver.

Question 3

Fiat Money

Answer 3

• has its value due to decree and legislation by
  the government
• Most world economies are fiat econmies.
• is created by central bank

Question 4

Bank

Answer 4

• Makes money from borrowing and lending
• Borrows from households, other banks and the central bank.
• Can create new money by loaning money out.

Question 5

Types of Money

Answer 5

• Bank deposits - IOU from commercial bank to consumers
• Central bank reserves - IOU from central bank to commerical banks
• Currency - IOU from central bank to consumers in an economy.

Question 6

Base Money

Answer 6

Central bank reserves and currency.

Question 7

Broad Money

Answer 7

Currency held by the private sector (consumers)
This is mostly in the form of bank deposits.

Question 8

Central Bank Reserves

Answer 8

• The Bank of England also guarantees that any amount of reserves can be
  swapped for currency should the commercial banks need it.
• Central bank creates monetary reserves by buying treasuries.

Question 9

Commercial bank balance sheet

Answer 9

Is made up of assets and liabilities.

Question 10

Bank’s Net Worth

Answer 10

-Assets - liabilities
-Also known as equity
- If liability is greater than assets, than the bank is in debt.

Question 11

Leverage

Answer 11

Reliance of a company on debt
Leverage = Total Assets/Net Worth

Question 12

Quantity Theory of Money

Answer 12

Money x Velocity = Price level x transactions

• When the velocity of money increases in means that the number of transactions in an economy has increased.
• assumes that the velocity of money is constant. If velocity is constant,
  its growth rate is zero and the growth rate in the money supply will equal the inflation rate.

Question 13

Money supply

Answer 13

An increase in money supply leads to a proportional increase in the price level and has no permanent impact on real income.

Question 14

Assumptions made in quantity theory of money

Answer 14

• Velocity of circulation is constant.
• Volume of transactions (T) is determined by the real sector and is not impacted by money supply.
• The economy is in equilibrium at full employment.