Money & Monetary Systems

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Cards (17)

  • The three key roles of money are medium of exchange, store of value, and unit of account
  • Money as a medium of exchange is an asset that can be traded for goods and services
  • Money, as a store of value, is an asset that enables people to transfer purchasing power into the future.
  • As a unit of account, money is a universal yardstick used to express relative prices of goods and services.
  • The quantity theory of money predicts that the inflation rate will equal the growth rate of the money supply minus the growth rate of real GDP
  • Fiat money is an asset used as legal tender by government decree and not backed by a physical commodity like gold, e.g. the U.S. dollar and other national currencies.
  • Fiat money has no intrinsic value, i.e. there is zero “direct” utility from it.
  • The money supply, M2, is the sum of currency in circulation, checking accounts, savings accounts, and most other bank accounts.
  • M2 is about 9 times the magnitude of currency in circulation.
  • Growth rate of nominal GDP = Growth rate of real GDP + Inflation Rate
  • The quantity theory of money assumes that the ratio of money to GDP is constant: Money Supply / Nominal GDP = Constant
  • The quantity theory of money's constant implies that the growth rate of money supply grows at the same rate as the growth rate of nominal GDP
  • Liquidity refers to funds (and assets) that can be used immediately to conduct transactions.
  • The demand curve for bank reserves shifts when one of the following changes occurs:
    • Economic expansion or contraction
    • Changed liquidity needs
    • Changed deposit base given the reserve requirement
    • Changd the reserve requirement (currently at 10%)
    • Changed the interest rate paid to deposits at the Central Bank.
  • The Supply Curve for Bank Reserves is vertical as the demand for bank reserves is inelastic.
  • Real interest rate = Nominal interest rate - Inflation rate
  • People form inflation expectations from 2 models: adaptive expectations (backwards -looking) & rational expectations (forward -looking).