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Macroeconomics SEM 2 > Monetary System > Flashcards

Monetary System Flashcards

1
Q

Define Money

A

Set of Assets in an Economy, used Regularly to buy G+S

- It is a Liquid Asset

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2
Q

What are the 3 main Functions of Money?

A
  1. Medium of Exchange
  2. Unit of Account
  3. Store of Value
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3
Q

Define Medium of Exchange

A

Item Buyers give to Sellers in exchange for G+S

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4
Q

Define Unit of Account

A

Measure of Economic Value

  • Represents Value of G+S
  • Records Debts
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5
Q

Define Store of Value

A

Can retain its Purchasing Power

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6
Q

Define Liquidity

A

Ease an Asset can be Converted into the Economy’s Medium of Exchange

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7
Q

What is the most Liquid Asset?

A

Money = Medium of Exchange

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8
Q

What is the general relationship between Liquidity + Return

A

Higher Liquidity –> Lower Return

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9
Q

What are the 2 main Kinds of Money?

A

Commodity Money + Fiat Money

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10
Q

What is Commodity Money?

A

Money in the form of a Commodity with Intrinsic Value

  • e.g. Gold, Paper Money convertible to Gold on Demand
    • Cigarettes + Phone cards in Prison
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11
Q

What is Fiat Money?

A

Money with NO Intrinsic Value

  • Requires people’s Trust- Loses Value without it
  • If Trusted– No Gov. necessary- e.g. Bitcoin
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12
Q

What is Money Stock?

A

Quantity of Money circulating the Economy

- Includes: Paper Bills + Coins in hands of Public + Demand Deposits

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13
Q

Define Demand Deposits?

A

Balances in Bank accounts Depositors can access on Demand

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14
Q

What are the 2 main measures of Money Stock?

A

M1 + M2

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15
Q

What is M1?

A
  • Currency in Circulation
  • Demand Deposits
  • Other checkable deposits
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16
Q

What is M2?

A
  • M1
  • Savings Deposits (Short term)
  • Money Market Mutual Funds
  • Other categories
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17
Q

What do Central Banks regulate?

A

Fiat Currencies

- e.g. BoE, Fed. Res., ECB

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18
Q

Define Central Bank

A

Legal Entity with Authority to:

  • Oversee Banking System
  • Regulate Money Supply
19
Q

What happens if too much money is printed?

A

Price Levels RISE–> Inflation

20
Q

What do I.R / Money Supply affect?

A

Economic Activity + Unemployment

21
Q

Why is Monetary Policy Important?

A

There is a TRADE OFF between Economic Activity / Unemployment + Inflation

22
Q

How does a Fall in I.R affect the Economy?

A

Inflation- bad

Increased Production–> Lower Unemployment in SR

23
Q

What is QE?

A

Quantitative Easing
Unconventional Monetary Policy
Jan 2010- MPC authorised purchase of £200 bn worth of Assets
–> Decreases I.R–> Increased C + I –> Increased AD
=> BUT Increased Inflation

24
Q

How do Banks influence the Money Supply?

A

Reserves

25
Q

What are Reserves?

A

Deposits Banks have received but NOT Loaned out

26
Q

What is 100% Reserve Banking?

A

ALL Deposits held as Reserves

27
Q

What is Fractional-Reserve Banking?

A

Banks holds a Fraction of Deposits as Reserves

–> Loan out remainder + earn Return on their Assets

28
Q

What is the Reserve Ratio?

A

Fraction of Deposits Banks MUST hold as Reserves

– In case Depositors want to Withdraw their Cash

29
Q

What is the Reserve Requirement

A

Minimum amount of Reserves Banks MUST hold in C.B

30
Q

What are Excess Reserves?

A

Reserves Banks hold above the Legal Minimum

31
Q

What is the Money Multiplier?

A

Amount of Money Banking System generates from Reserves

1 / rr

32
Q

How does the Reserve Ratio affect the Money Multiplier?

A

Increased rr –> Lower m

33
Q

Given the Money Multiplier, how do you find the Final level of Money?

A

Initial Deposit x 1/rr
= Initial Deposit x m
New Money Created = Final level of Money - Initial Deposit

34
Q

What are the 3 main tools C.B uses for Monetary Control?

A
  1. Open Market Operations
  2. Refinancing Rate
  3. Reserve Requirement
35
Q

What are Open Market Operations?

A

Purchase + Sale of Gov. Bonds by the C.B

36
Q

How does the C.B Increase M.S using OMOs?

A

C.B buys Gov. Bonds from Public–> Increased Money in hands of Public

37
Q

How does the C.B Decrease M.S using OMOs?

A

C.B sells Gov. Bonds to Public–> Decreased Money in hands of Public

38
Q

What is the Refinancing Rate?

A

I.R at which C.B lends to Commercial Banks on a Short-Term basis
- C.B controls I.R in Money Market–> Affects Retail I.R

39
Q

How does the C.B Increase M.S using Ref. Rate?

A

Decrease Ref. Rate–> Increased Borrowing

40
Q

How does the C.B Decrease M.S using Ref. Rate?

A

Increase Ref. Rate–> Decreased Borrowing

41
Q

What is the Reserve Requirement?

A

Regulations on Min amount of Reserves banks MUST hold against Deposits

42
Q

How does C.B Decrease M.S using Reserve Requirement?

A

Increase Reserve Requirement–> Lower Multiplier–> Lower M.S

43
Q

How does C.B Increase M.S using Reserve Requirement?

A

Decrease Reserve Requirement–> Higher Multiplier–> Higher M.S

44
Q

What are the main problems with Monetary Policy?

A
  • C.Bs control of M.S NOT Precise- Fractional Reserve Banking affects Money Multiplier
  • C.Bs do NOT choose how much Households deposit in Banks
  • Unable to control how much Banks lend than keep as Reserves

Macroeconomics SEM 2 (13 decks)

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