Money and interest rates

• What is narrow money?

  Physical currency and liquid assets
• What is broad money?

  The entire money supply including liquid assets
• What does money supply refer to?

  Stock of currency and liquid assets
• What are the functions of money?

  1. Medium of exchange
  2. Measure of value
  3. Store of value
  4. Method of deferred payment
• How does money function as a medium of exchange?

  It eliminates the need for a coincidence of wants
• What does money measure in terms of value?

  Relative values of goods and services
• Why must money hold its value?

  To be used for payment over time
• What does deferred payment mean in relation to money?

  Allows debts to be created for future payment
• What is the first characteristic of money?

  Durability
• Why is divisibility important for money?

  To trade exact values
• What does portability mean in the context of money?

  Easy to carry around
• What does uniformity refer to in money characteristics?

  Consistent value
• Why is limited supply a characteristic of money?

  It must be scarce to have value
• What does acceptability mean in terms of money?

  Confidence in money's value by users
• How does a change in money supply affect interest rates?

  It does not change the interest rate
• What does the Quantity theory of money state?

  Inflation occurs if money supply increases faster
• What does M stand for in the Fisher equation MV=PQ?

  Supply of money
• What does V represent in the Fisher equation?

  Velocity of circulation
• What does P stand for in the Fisher equation?

  Price level
• What does Q represent in the Fisher equation?

  Quantity of real goods sold
• What are the assumptions of the Fisher equation?

  V is constant and Q is supply-independent
• How does increasing money supply cause inflation?

  More money increases AD, leading to inflation
• What happens to wages when the money supply increases?

  Wages rise due to increased demand
• What is the effect of inflation on the real value of money?

  It decreases the real value of money
• How does the SRAS curve shift in response to inflationary pressure?

  It shifts due to increased wage demands
• What happens to the output level when inflation occurs?

  Output level readjusts while price level rises