topic 4

Question 1

What is money?

Answer 1

stock of assets readily used to make transactions

Question 2

4 functions of money?

Answer 2

medium of exchange
unit of account
store of value
standard of deferred payment

Question 3

What is fiat money?

Answer 3

currency a government has declared as legal tender, but is not backed by a physical commodity (eg. gold)

Question 4

What is commodity money?

Answer 4

money whose value comes from a commodity by which it is made

Question 5

2 official measures of money supply?

Answer 5

M0 - narrow money

M4 - broad money (money supply)

Question 6

What is M0?

Answer 6

Narrow money - level of notes and coins in circulation and banks operational balances at the bank of england

Question 7

What is M4?

Answer 7

broad money = the money supply

M0 + bank accounts

Question 8

Money supply = ?

Answer 8

currency + demand deposits

Question 9

What are reserves?

Answer 9

Portion of deposits that banks have not lent

Question 10

What is a 100-percent-reserve banking system?

Answer 10

A system in which banks hold all deposits as reserves

Question 11

What is fractional reserve banking?

Answer 11

A system in which banks hold a fraction of their deposits as reserves

Question 12

See notes

Answer 12

Scenario 1,2&3

Question 13

Equation to calculate total money supply?

Answer 13

Total money supply = original money x 1/rr

Where rr = ratio of reserves to deposits (ie. if banks hold 20% of reserves then rr=0.2)

Question 14

3 parts of model of money supply?

Answer 14

Monetary base
Reserve deposit ratio
Currency deposit ratio

Question 15

Equation for monetary base and what it depends on?

Answer 15

B=C+R
where B=monetary base, C= currency, R=reserves
controlled by central bank

Question 16

Equation for reserve deposit ratio and what it depends on?

Answer 16

rr=R/D
D=deposits
depends on banks regulations and policies

Question 17

Equation for currency deposit ratio and what it depends on?

Answer 17

cr=C/D

depends on household’s preferences

Question 18

See solving for money supply in notes

Answer 18

Now

Question 19

What is the money multiplier?

Answer 19

the increase in money supply resulting from a one pound increase in the monetary base

Question 20

3 equations for money multiplier?

Answer 20

1) m=(cr+1)/(cr+rr)
2) M=mB
3) (change in M)=m x (change in B)

Question 21

How can central banks change the monetary base? (and explanations) (2)

Answer 21

1) Open market operations = buying and selling government securities in the Open Market in order to expand or contract the amount of money in the banking system
2) The discount rate = the interest rate the Fed charges on loans to banks

Question 22

How can central banks change the reserve deposit ratio? (2) (and explanations)

Answer 22

1) Reserve requirements = minimum reserve-deposit ratio set by the Fed
2) Interest rate on reserves = the interest the Fed pays on bank’s deposits with them

Question 23

What happens if households change the currency-deposit ratio?

Answer 23

it causes changes in m and M

Question 24

What happens if banks change their reserve amounts?

Answer 24

it causes changes in rr, m and M