STUDY UNIT 3 Flashcards
What does the demand for money mean?
the need by economic participants to keep money and have it available
what are the four main functions of money?
money acts as a medium of exchange, serves as a unit of account, store of value and standard of deferred payment
what is a portfolio decision?
it is the choice by a financial market participant regarding how much of various assets of foods.
what are the assets of a portfolio decision?
shares, bonds (treasury bills). foreign exchange and money
what’s the difference between demand for active balances and passive balances?
the demand for active balance is by people’s need to do transactions, while the demand by passive balance is related to the need for wealth in the form of money.
what is the chain of events for the demand for active balances?
Y increase -> active transaction increase -> Md (demand for money) increase (and visa versa)
what is the chain of events for the demand for passive balances?
i increase -> passive demand for money decrease -> Md decrease (and visa versa)
what is the equation for the demand for money and what does it mean?
Md= RYL(i)
+ -
the function states that the demand for money is a function of the nominal level of output and income (RYL) and interest rates.
The positive sign under income indicates a positive relationship between the demand for income.
The negative sign under interest rates indicates the negative relationship between the demand for money and the interest rates
what happens to the interests rate if there is a downward movement along the money demand curve?
it indicates that interest rates decline and the money demand increases
what happens when interest rates declines?
the opportunity cost of holding money declines and the financial market participants are included to hold more money
what happens when there is an upward movement along the money demand curve?
interest rates increases and the money demand decreases.
what happens when interest rates increases?
the opportunity cost of holding money increases and the financial markets participants are willing to hold less money.
what assumption has been made about the quantity of money and money demanded?
it is assumed that the quantity of money is determined by the demand for money.
what relationship does money demanded and the quantity of demand have with each other?
an increase in the money demand leads to an increase in quantity of money. ( and visa versa)
what’s the impact and chain of events between money demand and the quantity of money?
Y increase -> Md increase -> M (quantity of demand) increases
As the level of income and output increases, the demand for money increases as well as the quantity of money
what are the two factors the determine the demand for money?
level of output and income and interest rates.
what happens to the quantity of money when interest rates decreases?
the quantity of money increases
what is the equilibrium in the financial markets?
where M = Md
since Md= RYL(i)
the equilibrium is M = Md
what is monetary policy?
when the monetary authorities to influence the quantity of money or rate of interest with a view to achieving stable prices, full employment and economic growth,
In South Africa, who deals with the monetary policy and what’s their role?
South African Reserve Bank (SARB) and the accommodation policy, also referred to as the refinancing of liquidity requirements.
how does the SARB controls the interest rates?
by using open-market operations to adjust the money market deficit in order to influence the market interest rates.
what is a repo rate?
the interest rate at which the accommodation or refinancing rakes place.
what does money consists of?
demand deposits (D) and currency (C)
Explain the demand deposits
A demand deposits is a bank de[posit that can be withdrawn without notice. A demand deposit is created when a person deposits a sum of money with a bank
