week 19

Question 1

what is money

Answer 1

any asset that can be used in making purchases

Question 2

what is barter

Answer 2

trading goods directly
money makes this unnecessary

Question 3

what are the three principal uses of money

Answer 3

medium of exchange
unit of account
store of value

Question 4

how is money a medium of exchange

Answer 4

an asset used in purchasing goods and services

Question 5

how is money a unit of account

Answer 5

basic measure of economic value
allows to make easy comparisions

Question 6

how is money a store of value

Answer 6

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

Question 7

why do people hold money

Answer 7

liquidity - relative speed and ease which an asset can be converted into a medium of exchange, liquidity is highly desirable

Question 8

why do people hold money

Answer 8

illegal activities
corruption
fear of political and economic instability
fear of deflation and negative interest rates

Question 9

what is the demand for money

Answer 9

amount of wealth an individual chooses to hold in the form of money
opportunity cost of holding money is
i = (i-π) - (0-π)

Question 10

what is the money demand curve

Answer 10

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

Question 11

what are bank reserves

Answer 11

cash or similar assets held by commercial banks for meeting depositor withdrawals and payments
not included in money supply

Question 12

what is 100% reserve banking

Answer 12

where the banks reserves equal 100% of their deposits

Question 13

how do you calculate bank deposits

Answer 13

bank reserves / desired reserve-deposit ratio

Question 14

what is securitisation

Answer 14

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

Question 15

what is the federal reserve

Answer 15

central US bank
conduct monetary policy and oversee and regulate financial markets

Question 16

how does FED control money supply

Answer 16

open-market purchase - gov bonds from public, increases reserves and money supply
open-market sale - gov bonds to public, decreases reserves and money supply

Question 17

how does FED control nominal interest rate

Answer 17

increase money supply

Question 18

what are banking panics

Answer 18

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

Question 19

what is deposit insurance

Answer 19

deposits will be repaid even if the bank is bankrupt
less risk, depositors pay less attention to whether banks are making good investments

Question 20

how does inflation affect money

Answer 20

price level increases rapidly, so money loses value rapidly and people become more reluctant to hold their wealth in this form

Question 21

what is the quantity theory of money

Answer 21

how the price level is determined and why it might change overtime

Question 22

what are nominal variables

Answer 22

variables measured in monetary units

Question 23

what are real variables

Answer 23

variables measured in physical units

Question 24

what is the quantity equation

Answer 24

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

Question 25

what is monetary neutrality

Answer 25

irrelevance of monetary changes for real variables

Question 26

how do you calculate velocity of money

Answer 26

nominal GDP / money stock
measure of speed at which money changes hands in transactions for final goods and services

Question 27

what is an inflation tax

Answer 27

tax on everyone who holds money
reduction in the value of money when the gov prints more

Question 28

what is monetarism

Answer 28

theory of controlling the supply of money as the chief method of stabilising the economy

Question 29

what is the fiscal theory of price level

Answer 29

FTPL explains the relationship between fiscal policy, gov budget and price level
argues that price level is determined by gov budget decisions

Question 30

what is the payment system

Answer 30

method of conducting transactions in the economy

Question 31

what is commodity money

Answer 31

any money made up of precious metals or another valuable commodity

Question 32

what are cryptocurrencies

Answer 32

digital asset designed to be a medium of exchange
decentralised and based on a network distributed across many computers that verify records and transactions

Question 33

what are central bank digital currencies (CBDC)

Answer 33

public or central bank issued digital currencies
pros: fast, secure, reduce transaction costs
cons: untested in periods of crisis, might affect monetary policy transmission