Chapter 11 Flashcards
(32 cards)
Bartering system
goods were exchanged for other goods of more or less the same value
Liquidity
how quickly money can be converted into cash
Primary or liquid money
Cash
Legal tender
Medium of payment that, by law, must be accepted. The currency of the country is the legal tender. In SA, Bank notes and coins (Rands).
Functions of money
A medium of exchange - So people can get paid
A store of value - People don’t have to spend all of their money they earn, they can store it.
A measure of value (unit of account) - To set a value on the price of goods
A standard of future payment -
Secondary money
Demand desposits, bank deposits and EFTs
Quasi or near money
Notice accounts
M1
for coins and notes in circulation plus cheque accounts (demand deposits)
M2
for M1 plus short and medium-term deposits
M3
for M2 plus long-term deposits
Fiat money
money not backed up by any physical asset or commodity, value comes from government orde
Money-associated instruments
Physical Money
Credit cards
Non-conventional - Crypto
The value of money
The value of money depends on what our money can buy in terms of goods and services. It has value only in terms of the promise of government.
CPI
To measure the value of money, we look at how prices change over time using price indexes such as the Consumer Price Index (CPI), prepared by Statistics South Africa
the CPI measures the change in the average price of a basket of goods and services purchased by a typical urban household
Deflation
Occurs when price levels of goods and services decrease continuously over a long time.
Inflation
Inflation is defined as a continuous increase in the general price level over a specific period. The CPI shows inflation for consumers.
Measures to stabilise inflation
Setting minimum cash reserves
Increasing/decreasing interest rates (SARB)
Setting inflation targets
Disinflation
A decrease in the rate of inflation. A temporary slowing of the pace of price inflation. E.g. 7.1% to 5.4%
Aims of Monetary Policy
To protect the value of the currency in order to ensure economic growth in the country
To control money supply and credit levels in the financial sectors. i.e. banks must not be at risk of failure
To establish interest rates that will encourage investments and savings but are affordable to those wanting to borrow money
To obtain exchange rates that are to the advantage of the country
Reasons for inflation
Increase in oil prices
High salary increases
Increase in consumption
Increase in money supply
Interest Rates
The price that borrowers must pay for the use of cash that is not their own, and the return (income) a lender enjoys by parting with their liquidity. Interest is usually expressed as a rate (percentage).
Repo (Repurchase) Rate
The rate at which the central bank of a country lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.
Variable Interest Rates
Fluctuating interest rates are tied to a benchmark rate, which changes periodically.
Prime Rate
The interest rate that commercial banks charge their most creditworthy customers, generally large corporations.
