week 19 Flashcards
what is money
any asset that can be used in making purchases
what is barter
trading goods directly
money makes this unnecessary
what are the three principal uses of money
medium of exchange
unit of account
store of value
how is money a medium of exchange
an asset used in purchasing goods and services
how is money a unit of account
basic measure of economic value
allows to make easy comparisions
how is money a store of value
serves as a means of holding wealth and retaining purchasing power into the future
saves purchasing power from the time we receive income until we spend it
anonymous and difficult to trace
why do people hold money
liquidity - relative speed and ease which an asset can be converted into a medium of exchange, liquidity is highly desirable
why do people hold money
illegal activities
corruption
fear of political and economic instability
fear of deflation and negative interest rates
what is the demand for money
amount of wealth an individual chooses to hold in the form of money
opportunity cost of holding money is
i = (i-π) - (0-π)
what is the money demand curve
relationship between aggregate quantity of money demanded and nominal interest rate
increase in nominal interest rate increases the opportunity cost of holding money, reduces the quantity of money demanded
what are bank reserves
cash or similar assets held by commercial banks for meeting depositor withdrawals and payments
not included in money supply
what is 100% reserve banking
where the banks reserves equal 100% of their deposits
how do you calculate bank deposits
bank reserves / desired reserve-deposit ratio
what is securitisation
a practice by which banks can pool existing loans and sell them to another financial institution
pros: increases credit supply
cons: depends on creditworthiness of mortgagees and willingness of capital markets to hold securitised debts
what is the federal reserve
central US bank
conduct monetary policy and oversee and regulate financial markets
how does FED control money supply
open-market purchase - gov bonds from public, increases reserves and money supply
open-market sale - gov bonds to public, decreases reserves and money supply
how does FED control nominal interest rate
increase money supply
what are banking panics
occur when customers think one or more banks might be bankrupt
rush to withdraw funds
everyone tries to withdraw before bank runs out of money
banks have inadequate reserves to meet demand
what is deposit insurance
deposits will be repaid even if the bank is bankrupt
less risk, depositors pay less attention to whether banks are making good investments
how does inflation affect money
price level increases rapidly, so money loses value rapidly and people become more reluctant to hold their wealth in this form
what is the quantity theory of money
how the price level is determined and why it might change overtime
what are nominal variables
variables measured in monetary units
what are real variables
variables measured in physical units
what is the quantity equation
shows the increase in quantity of money in an economy must be reflected in price level rise, quantity of output must rise or velocity of money must fall
states that money x velocity = nominal GDP
M x V = P x Y
shows a relationship between money and price level
velocity represents the number of times a unit of currency is spent in a given period
what is monetary neutrality
irrelevance of monetary changes for real variables
how do you calculate velocity of money
nominal GDP / money stock
measure of speed at which money changes hands in transactions for final goods and services
what is an inflation tax
tax on everyone who holds money
reduction in the value of money when the gov prints more
what is monetarism
theory of controlling the supply of money as the chief method of stabilising the economy
what is the fiscal theory of price level
FTPL explains the relationship between fiscal policy, gov budget and price level
argues that price level is determined by gov budget decisions
what is the payment system
method of conducting transactions in the economy
what is commodity money
any money made up of precious metals or another valuable commodity
what are cryptocurrencies
digital asset designed to be a medium of exchange
decentralised and based on a network distributed across many computers that verify records and transactions
what are central bank digital currencies (CBDC)
public or central bank issued digital currencies
pros: fast, secure, reduce transaction costs
cons: untested in periods of crisis, might affect monetary policy transmission
