5.1 Money And Interest Rates Flashcards
What are the four functions of money
A medium of exchange
A measure of value (unit of account)
A store of value
A method of deferred payment
What is meant by a medium of exchange
Allows goods and services to be traded allowing people to get what they want for the exact value
What is meant by a measure of value (unit of account)
Provides a mean to measure the relative value of different goods and services
What is meant by a store of value
Money has to hold its value to be used as payment
It can be kept without expiring
What is meant by a method of deferred payment
Money can allow debts to be created
People can pay without money present and pay for it later
What are the characteristics of money
Durability
Divisibility
Portability
Uniformity
Limited supply
Acceptability
What is meant by money supply
This is the stock of currency and liquid assets in an economy
Includes cash and money held in savings accounts
What is narrow money
This is physical currency as well as deposits and liquid assets in the central bank
What is broad money
This is the entire money supply. Includes liquid and less liquid assets
What is the relation between inflation and interest rates
High interest rates are used during high inflation as they encourage saving not spending
Low interest rates used during low inflation to encourage spending
