Money

Front 1

What are the functions of money

Back 1

Standard of deferred payment, Unit of account, medium of exchange and store of value

Front 2

What are the characteristics of money

Back 2

Homogeneous,

divisible,

durable,

acceptable,

non counterfeitablity,

stability of value and

transportable

Front 3

What is money

Back 3

Money can be defined as anything which is generally acceptable as a means of settling debt

Front 4

Types of money

Back 4

Commodity money: commodity money refers to objects such as precious stones Metals soft shells exedra. It arrives its value from the underlying value of the physical commodity. It's can prove to be an inconvenience as a medium of exchange and a standard of deferred payment. In other words commodity money has intrinsic or real value.

Representative money refers to money that have a paper to work on a certificate that can be exchanged for a fixed quantity of a commodity

Fiat money: Fiat money has no intrinsic value and is not backed by any physical commodity. However Fiat money is considered to be a means of acceptable payment are a means of settling debts because of government has has declared it as legal tender. That is Fiat money fulfills the functions of money as it was stipulated as such by the government.

Front 5

Define the term money supply

Back 5

Refers to the total stock of money available in an economy at a particular time

Front 6

What does money supply include?

Back 6

Cash which refers to bank notes & Coins which are issued by the central bank

Money held in deposits at financial institutions

Front 7

What are the monetary measures or aggregates

Back 7

M0: monetary base is defined as the total amount of cash in the economy. It consists of money that is in circulation in the economy and money held in central banks.

M1: narrow money is defined as money that is available for immediate payment. It consists of the monetary base, short term deposit demand deposit, traveler's check and checkable deposits

M2: broad money are measures of the total amount of cash in an economy. It's consists of M1, time deposit, long term deposit, Passbook, savings account, money market deposit.

Front 8

Define the Liquidity Preference Theory

Back 8

Shows that the demand for money is determined by tm, pm and sm. These motives combine to give a a demand curve by adding onto the active balances tm and pm which is not affected by changes in interest rates, to sm which varies with interest rates.

Front 9

Describe in detail each motive for demanding money

Back 9

The transactional you notice for demanding money arises from the Fox the most transactions involves the exchange of money. Because it is necessary to have money available for transactions money will be demanded. The total number of transactions tends to increase as income rises. Hence as income Rises the demand for money will also increase.

Precautionary motive: people often demand money as a precaution against an uncertain future. Unexpected expenses such as medical bills often require immediate payment. The need to have available money in such situations is referred to as the precautionary motive for demanding money.

Speculative motive: the demand for an asset depends on is rate of return and the opportunity cost. Money Holdings provide low rate of return and often depreciate in value due to inflation. The opportunity cost of holding money is the interest rate that can be earned by lending or investing one's money Holdings. The speculative motive for demanding money arises in situations where holding money is perceived to be less risky than the alternative of lending the money or investing the money in some of the asset.

Front 10

Express how each motive is affected by interest rates

Back 10

Both transaction Airy and precautionary motive is not influenced by the rate of interest. Whether interest rates rise or decrease the demand for transactionary money and precautionary money would remain constant. However the presence of speculative motive for demanding money is also affected by the expectations of future interest rates. If interest rates are expected to rise the opportunity cost of holding money will become greater which in turn diminishes the speculative money for demanding money.

Front 11

Explain the two ways in which individuals hold wealth

Back 11

Financial assets is any form of investment where interest is earned but a price risk is involved. Price risk refers to a risk arising due to variations in the rate of interest which would cause the price of financial assets to fluctuate. There is an inverse relationship between interest rates and the price of financial assets.

Money there is no risk involved in holding money. No interest rate is on on speculative balances. The value of money does not fluctuate with the change in interest rates.

Front 12

Explain two effects of changes in interest rates and speculative balances

Back 12

If actual rate of interest in the economy is lower than the normal rate of interest investors will hold most of the wealth in the form of money the selling their bonds etc. The sell it because there would be a capital loss if the assets are held. This is the normal rate is higher than actual rate speculative demand for money would be high.

If actual rate is higher than normal rate of interest, speculators would assume that the actual rate will decrease thus the price of financial assets will increase, i.e, individuals would buy more stock. Therefore since actual is higher than normal speculative demand for money would be low.

Front 13

Explain John Maynard Keynes liquidity preference Theory

Back 13

This Theory holds that interest rates are determined by the interaction between the supply and demand of money. The demand for money is called the liquidity preference, which refers to the amount of money an individual May hold, which is inversely related to the rate of interest. The supply of money is fixed by the monetary Authority. As a result the money supply is represented by a vertical line.

Front 14

Define the term money demand

Back 14

Money demand is the amount of money individuals may have in their possession

Front 15

What is monetary policy?

Back 15

Monetary policy refers to tools that the government can use to influence the level of aggregate demand in the economy. This is through the control of money supply and the interest rate. It is done through a government-appointed Central Bank, consider the sole monetary Authority.

Front 16

What are the four objectives of monetary policy

Back 16

Full employment

Low inflation

Economic growth

balance of payments equilibrium

Front 17

What are the types of monetary policy

Back 17

Expansionary monetary policy: a lowering of the interest rates causes the level of aggregate demand in the economy to increase. This is because the interest rate is low investors are encouraged to increase investment spending and low interest rates causes more consumption. These two responses would result in an upper shift of the aggregate expenditure curve at a higher level of income. To achieve this policy makers will get the money market by increasing the supply of money. This is referred to as an implementation of an expansionary monetary policy.

Contractionary monetary policy: an increase in the rate of interest has a restraining affect on the level of aggregate expenditure. Policymakers wanted to curb the rate of inflation or decrease the inflationary pressure they will choose to decrease the money supply. Therefore consumers will choose to consume less and investors would choose to invest less as the price of borrowing would be too high.

Front 18

What are the tools of monetary policy

Back 18

Refers to various methods available to the government or the central bank to control the supply of money and the rate of interest.

Front 19

Define the following terms:

Employed,

Unemployed,

Under employed.

Back 19

Employed means to hire or engage in the exchange of services for money.

Unemployed means someone who is not currently employed but is actively seeking employment

Under employed a person not having enough paid work or not doing work that makes full use of their skills and abilities

Front 20

Explain how unemployment may affect the economy

Back 20

Unemployment extend far beyond the loss of income suffered by the unemployed in the future. Society and economy as a whole are at it don't fall when resources are under employed or unemployed. Because resources unemployed no output is produced comma the economy as a whole produces at a lower level than that associated with its optimal potential. A high unemployment rates can significantly reduce the growth potential of an economy unemployment in this regard also possess an additional financial burden to the state as a whole especially in those economies with social security facilities and unemployment benefits as these transfers would increase as the rate of unemployment increases. Some of the additional social costs associated with unemployment includes poverty and crime.

Front 21

Discuss the causes of the types of unemployment.

Back 21

Frictional or transitional unemployment: is defined as unemployment that arises as a result of the time lag associated with moving from one job to another. Frictional unemployment also arise as a result of geographical or occupational Mobility for example unemployment may exist if unemployed labor at the demand for labor in two different geographical regions are in the skills of the liver. Not match the needs of the labor market

Casual or seasonal unemployment: arises as a result of the changes in the unemployment needs of certain industries for example casual unemployment occurs in the Agricultural and tourism sectors both of which experienced Peak and off-peak seasons

.

Structural unemployment: results from the mismatch between the existing skills base of the labor force and the needs of the Labour Market. Specifically structural unemployment arises where the Capital stock of an economy cannot efficiently absorb the existing labor force. Unemployment as a result of technological changes a shift in demand

Classical unemployment: classical economist advocate that unemployment exist from the excessively high real wage level, which rendered the market mechanism unable to clear

Keynesian/demand deficient/cyclical unemployment: Keynes highlighted that the major cause of unemployment was an insufficient level of aggregate demand. It was in this context that Keynes suggested that increased government intervention what stimulates aggregate demand and hence alleviate the problem of unemployment.

Front 22

What is the business Cycle/trade cycle?

Back 22

The business/trade cycle refers to the cyclical nature of economic activity overtime as it moves between booms and recessions.

Front 23

What effect will a boom have on the economy.

Back 23

At this stage of the trade cycle the level of output and employment in the economy rises to a very high level. During this period a higher standard of living usually occurs for economic agents. If a boom causes income to rise to full employment level of income, any further increases in expenditure will result in inflation, therefore it is necessary to curb spending in order to avoid inflation. Reason being, the cost of consumption would be too fight and as a result individuals will try to save more of their money as prices of goods and services would increase.

Front 24

Effects of a recession in an economy.

Back 24

A recession is when the volume of I output and employment in the economy has fallen. As a result the level of income in the economy would decrease and therefore would lower the living standards of economic agents. This slump decreases the total spending in the economy and also lower the inflationary pressure. It also reduces spending on imported goods and improves the current account of the balance of payments. Keynes argues that it was up to the government to create demand during a recession through increased spending on public investment projects.

Front 25

What is a fiscal policy?

Back 25

Fiscal policy is the management of the economy through the level of taxation and government spending.

Front 26

What is the difference between Reflationary fiscal policy and contractionary fiscal policy?

Back 26

Expansionary/Reflationary fiscal policy: expansionary policies are implemented in times of recession when there is downward economic activity. Taxes would be lowered and government expenditure increases which would lead to an upward shift of the AE curve.

Contractionary/Deflationary fiscal policy: when an economy is growing above its capacity a conractionary fiscal policy is implemented. It's implemented because it can result in inflation and balance of payment issues. As a result taxes are increased and government expenditure would be decreased which would lead to a downward shift of the AE curve.

Front 27

What factors influence the potency of fiscal policy?

Back 27

Crowding out effect: if the government implements an expansionary fiscal policy by decreasing tax and increasing their spendimg, this will lead to budget deficit. To finance this deficit the government will have to borrow. This puts an upward pressure on the rate of interest as the government competes for limited funds with the private sector. As interest rates increases, consumption and investment are discouraged and leads to a fall in aggregate expenditure. Overall as government spending crowds out private sector spending this counteracts with the impact of an expansionary fiscal policy making it less effective.

Excess Capacity: the effectiveness of the fiscal policy in achieving an increase in the level of output produced in the economy also depends on whether or not the economy possesses excess capacity.if full employment already exists in the economy, then expansionary fiscal policy would be ineffective in achieving an increase in output as the only result would be inflation.

Front 28

What are the three main types of taxation that the government may implement?

Back 28

1. Direct taxes: these are based on income or wealth and are paid to the taxation authorities of the government.

2. VAT/ad valorem: is based on the value of the good

3. Indirect taxes: are taxes on expenditure. These are included in the selling prices of goods and services. The seller collects the tax and passes it onto the taxation authorities

Front 29

Define the following types of taxes:

1. Specific taxes

2. Taxes

3. Regressive

4. Progressive taxes

5. Proportional taxes

Back 29

1. Specific taxes: Pacific taxes are taxes that are applied for each unit of the good or service purchased by consumers

2. Taxes: taxes reduce the amount of goods or services consumers can afford with their income. This reduction of consumers purchasing power is called a tax burden.

3. Regressive tax is one where as income rises the percentage of income paid in taxes fall.

4. Progressive tax is one where as income rises the percentage of income paid in taxes increases.

5. Proportional taxes would apply if the income tax is fixed and hence the percentage of income stays the same as income rises.

Front 30

What is the balanced budget multiplier?

Back 30

The balanced budget multiplier occurs whenever there are equal increases in both autonomous government spending and taxation.

Front 31

What is the demand management policy?

Back 31

This refers to the the government can rely on to influence the level of aggregate demand in the economy. It refers to fiscal and monetary Policy.

Front 32

What are the different types of lags of monetary and fiscal policy?

Back 32

1. Administrative lag: refers to the time it takes to implement an appropriate policy after the economic authorities has recognised a macroeconomics problem exist

2. Recognition lag: refer to the time it takes to recognise that there is a problem such as recession are inflation. This is because economic data usually takes a long time to compile which leads to a delay in the analysis of the economy

3. Impact lag: this refersto the time it takes for the policy measure to work or become effective to achieve the macroeconomic objective.

Front 33

With reference to the equation, how is government expenditure financed?

Back 33

Taxation, borrowing and creating money

Front 34

What are supply side policies?

Back 34

Supply side policies are set apart from demand side policies in that instead of manipulating aggregate demand in the economy it aims to permanently increase output by improving the supply side of the economy. In other words these policies refers to government initiatives which increases the output capacity of the economy

Front 35

What is the aim of supply side policies?

Back 35

The aim of supply side policies is to improve the efficiency of Markets by reducing market imperfection. This can be split into measure which deal with product market imperfections and those which improve the efficiency of the Labour market.

Front 36

Differentiate between product market supply side policies and labour market supply side policies.

Back 36

Product market supply side policies: the nature of product market supply side policies is that they are designed to increase competition and thus production efficiency. As the productivity of firms across the economy increases this will enable more output to be produced from a given amount of resources.

Labour market supply side policies prescriptions: policies are designed to improve the quantity and quality of the Labour supply in the Labour market. The increase in the quantity of Labour will increase the labour force which will obviously increase the potential labour productivity of the economy.

Front 37

Draw a graph illustrating the demand management policy, supply side policies and the ppf curve as a result of supply side policies and demand management policies.

Back 37

Front 38

What is the public sector borrowing requirement?

Back 38

The public sector borrowing requirement refers to the amount the government needs to borrow in a given time period.

Front 39

How is the public sector borrowing requirement financed?

Back 39

Public sector borrowing requirement can be financed by the surplus that the government earns from its revenues

Front 40

What are the factors in support of government borrowing?

Back 40

Government gross capital formation: economists believe that government borrowing is more acceptable if it is spent on capital goods rather than current spending. If the borrowed money is spent on machines or infrastructure then the productive potential of the economy will increase. As such the resulting future increases in income will make up for the money borrowed and the interest on the debt.

Demand management: keynesian economists believe in the importance of managing the level of aggregate demand in the economy. At times when there's a lot of spare capacity in the economy it is felt that the government must step in and force the level of demand up usually through government spending. Since tax revenues from income are likely to be relatively low during a recession, the only way that government can increase its spending is if it borrows money.

Front 41

Explain two factors that are against government borrowing?

Back 41

Crowding out effect

Inflationary pressure: government spending financed by borrowing the result in inflationary consequences on the domestic economy. This type of inflation is known as demand pull inflation.

Front 42

Explain two measures that are available to reduce the debt burden.

Back 42

Lowering of domestic interest rates: this would reduce the cost of government borrowing from domestic sources and hence reduce the debt burden

Growth promotion: an economy which is heavily indebted may be able to reduce its overall debt radio via the promotion of growth revival policies in the economy. This may be achieved by focusing on the Promotion of the supply side policies however this may be difficult to obtain Givens and financial constraints faced by the existing debt Burden