Chapter 2

Question 1

Is an item or commodity that is generally accepted as a means of payment of goods and services or for payment of debt, and that serves as an asset to its holder

Answer 1

Money

Question 2

an economic unit that functions as a generally recognized medium of exchange for transactional purposes in an economy

Answer 2

Money

Question 3

Function of Money:

It is accepted freely in exchange for all other goods

Answer 3

Medium of Exchange

Question 4

Function of Money

acts as a common measure of value; it is a unit of account and a standard of measurement

Answer 4

Measure of Value

Question 5

Function of Money

money is a convenient form to store wealth

Answer 5

Store of Value

Question 6

Function of Money

barter system is very inconvenient so the introduction of money has got over the difficulty of barter

Answer 6

Medium of Exchange

Question 7

Function of Money

it forms the basis for credit transactions

Answer 7

Standard of Deferred Payment

Question 8

Is the total value of money available in an economy at a point of time

Answer 8

Money Supply

Question 9

It includes all coins and paper money issued by the government and the banks

Answer 9

Currency

Question 10

Four key measures for the Money Supply

Answer 10

M1. The narrow Measure
M2. Intermediate Measure
M3. Broad Measure
M4. (L) Broadest Measure

Question 11

Key Measure

It includes all currency in circulation, traveler’s checks, demand deposits at commercial banks held by the public and other checkable deposits

Answer 11

M1. Narrow Measure

Question 12

Key Measure

It refers primarily to money used as a store of value

Answer 12

M2. Intermediate Measure

Question 13

Key Measure

Includes everything in M2 as well as large time deposits, balances in institutional money market funds, and term repurchase agreements

Answer 13

M3. Broad Measure

Question 14

Key Measure

In addition to everything in M3, this includes liquid and near liquid assets.

Answer 14

M4. (L) Broadest Measure

Question 15

In monetary economics, it is the desired holding of financial assets in the form of money, that is, cash or bank deposits rather than investments

Answer 15

The Demand for Money

Question 16

3 several factor of Demand Money

Answer 16

Level of income
Interest Rates and Inflation
Uncertainty about the future

Question 17

People prefer to be liquid for day-to-day expenses. The amount of liquidity desired depends on the level of income, the higher the income, the more money is required for increased spending.

Answer 17

Transaction Demand

Question 18

Is the demand for liquidity to cover unforeseen expenditure such as an accident or health emergency. The demand for this type of money increases as the income level increases

Answer 18

Precautionary demand

Question 19

The demand to take advantage of future changes in the interest rate or bond prices

Answer 19

Speculative Demand

Question 20

The lower the rate of interest, the lower this demand for money and vice versa

Answer 20

Speculative Demand

Question 21

This theory states that money supply and price level in an economy are in direct proportion to one another

Answer 21

Quantity Theory

Question 22

It is the mathematical expression of the quantity theory of money

Answer 22

The Equation of Exchange

Question 23

The Equation of Exchange

Answer 23

M x V = P x Y

Question 24

The cost of using money

Answer 24

Interest

Question 25

Money paid regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt

Answer 25

Interest

Question 26

It is the amount a lender charges for the use of assets expressed as a percentage of the principal

Answer 26

Interest Rates

Question 27

It is the interest rate that is earned at a bank or credit union from savings account or certificate of deposit.

Answer 27

Annual Percentage Yield (APY)

Question 28

2 main sources of funds

Answer 28

Cost of Equity | Cost of Loans

Question 29

The rate at which the quantity of money demanded is equal to the quantity of money supplied

Answer 29

Equilibrium Interest Rates

Question 30

Refers to the interest rate before taking inflation into account

Answer 30

Nominal Interest Rate

Question 31

Is the rate of interest an investor, saver, or lender receives after allowing for inflation

Answer 31

Real Interest Rate

Question 32

The compensation, over and above inflation, that a lender demands to lend his money

Answer 32

Pure Interest or Real Interest

Question 33

Change in the level of prices

Answer 33

Inflation

Question 34

The compensation that a lender receives for investing funds in something that is difficult to sell

Answer 34

Liquidity RIsk

Question 35

The risk that the loan or bond won't be repaid as scheduled, or not at all

Answer 35

Credit Risk