TOPIC 10

Question 1

Money

Answer 1

Set of assets in an economy that people regularly use to buy goods and services from other peoples

Question 2

Barter process

Answer 2

transactions would require a double coincidence of wants

Question 3

The functions of money

Answer 3

medium of exchange, unit of account, store of value

Question 4

Medium of exchange

Answer 4

anything that is readily acceptable as payment

Question 5

Unit of account

Answer 5

yardstick people use to post prices and record debts

Question 6

Store of value

Answer 6

money used in transaction has value in future

Question 7

Liquidity

Answer 7

the ease with which an asset can be converted into the economies medium of exchange

Question 8

commodity money

Answer 8

takes the form of a commodity with intrinsic value so acts as money but can do other things

Question 9

commodity money examples

Answer 9

gold, cattle, pot noodles and cigs in prison

Question 10

fiat money

Answer 10

used as money because of government decree, with no intrinsic value just to facilitate exchange.

Question 11

is crypto money?

Answer 11

1.not credible store of value, dont know what value will be within very large margins and value is volatile 2. supply of crypto is not controlled/issued by govt

Question 12

crypto

Answer 12

digital money that’s secure and doesn’t need a bank.

Question 13

currency

Answer 13

paper bills and coins in hands of public

Question 14

demand deposits

Answer 14

balances in bank accounts that depositors can access via online banking, eftpos or atm machine

Question 15

who creates money normally

Answer 15

commercial banks

Question 16

how is money created normally

Answer 16

1.banks receive deposits 2.banks keep some of these as reserves (in case ppl want to take out) 3.banks loan out rest of money so keeps fraction (reserves) 4.banks have to keep some reserves also at RBNZ for prudential reasons (reduce risks) 5. but most of deposits go out as loans to someone else 6. only keep fraction of deposits as reserves and lend out the rest.

Question 17

how is money created simplified

Answer 17

1.People put money in the bank (deposits).
2.Banks keep a bit in case people want to withdraw (reserves).
3.Banks loan out the rest to others.
4.Banks also keep some reserves at the RBNZ to stay safe.
5.So, most money is loaned out, not sitting there.
6.Banks only keep a fraction, and lend out the rest.

Question 18

How much money can be created by banks?

Answer 18

More reserves = less lending
Less lending = less profit for banks
Less lending = smaller increase in money supply (because loans create new money)

Question 19

how do banks earn money?

Answer 19

What they pay you for savings (low interest)
What they charge borrowers for loans (higher interest)

Question 20

change in money supply equation

Answer 20

ΔMS=D( 1-R)

Question 21

How can RBNZ influence how much money banks can create

Answer 21

-can change quantity and type of reserves banks need to hold - can affect the interest rate banks have to pay to borrow from RBNZ

Question 22

OCR

Answer 22

rate of interest RBNZ charges banks if banks are in some misalignment with each other

Question 23

y does RBNZ exist

Answer 23

tries to ensure the monetary system doesn’t spiral into mass inflation

Question 24

Consumer price index

Answer 24

measures the weighted average level of prices that consumers have to pay for a fixed basket of goods and services.(measure of inflation)

Question 25

why do we care?

Answer 25

w= nominal wage, p = price level, w/p = real wage so if p is increase faster than w we cant buy as any things

Question 26

what determines price level

Answer 26

money supply

Question 27

what determines rate of inflation?

Answer 27

changes in money supply

Question 28

what determines changes in money supply

Answer 28

commercial banking system

Question 29

inflation

Answer 29

increase in general price level

Question 30

zero inflation

Answer 30

a constant price level from year to year

Question 31

deflation

Answer 31

a decrease in general price level

Question 32

disinflation

Answer 32

a decrease in rate of inflation

Question 33

nominal interest rate

Answer 33

rate of interest paid for loans on deposits.

Question 34

real interest rate

Answer 34

adjusts the nominal rate for the effects of inflations

Question 35

costs of inflation

Answer 35

reduces purchasing power, shoe leather costs, many costs, tax distortions, confusion and inconvenience, arbitrary redistribution of wealth

Question 36

reduces purchasing power

Answer 36

Inflation raises the price level, lowering the value of money. real wages go down — so your income buys fewer goods and services.

Question 37

shoe leather costs

Answer 37

time, effort, and resources people use to avoid holding cash when inflation is high, because the real value of cash falls over time.

Question 38

menu costs

Answer 38

firms must constantly update prices as price level rises. the cost to print and change systems

Question 39

tax distortions

Answer 39

inflation increases nominal income pushing people to higher tax brackets, real income doesn't change but tax burden rises unfairly.

Question 40

confusion and inconvenience

Answer 40

unstable price levels make it hard to compare prices or plan. people and firms misinterpret price signals.

Question 41

arbitrary redisbrutipn of wealth

Answer 41

inflation lowers real interest rates, borrowers benefit (repay in chapter money) savers lose (less return"

Question 42

relative price variability

Answer 42

The rate of inflation and price level refer to the whole economy, but prices of individual firms can change faster or slower. making it harder for people and businesses to decide what to buy or sell efficiently.

Question 43

money is neutral

Answer 43

Money has no effect on real goods or services; it only affects the price level.

Question 44

what does supply of money affect

Answer 44

It determines the price level, inflation rate, and affects nominal income NOT REAL.

Question 45

what actualllyt does effect real income?

Answer 45

Technological change, capital, and human capital affect real income.

Question 46

why doesn't money supply affect real income

Answer 46

Increasing money supply just makes prices rise (inflation), so you have more money but can only buy the same amount of goods — it creates more expensive stuff, not more stuff.

Question 47

is deflation good?

Answer 47

No. If people expect prices to fall, they wait to buy. Spending drops, businesses earn less, jobs are lost, and the economy slows down, causing a depression.