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21 Cards in this Set

  • Front
  • Back

What is money?

A form of asset that is used as a medium of exchange, as a unit of account and a store of value.

M3 is comprised of

Currency (coins and notes), current deposits (cheque accounts) and non-current deposits (savings).

Currency is a form of token money which is

Money for which the intrinsic value of the commodity used to hold the monetary unit is less than the recorded value of the money

Broad money refers to

M3 plus the borrowings from non bank financials less the currency and bank holdings of these firms

Credit cards are

Not money, and are just a simple method of obtaining short term loans

M0, the monetary base, is composed of

Currency in public and banks plus the banks demand deposits with the RBA

The two components of the demand for money are

The transactions demand and the assets demand for money

The transactions demand for money is

THe demand for money as a medium of exchange, and depends on money GDP. Is vertical

The assets demand for money is

The demand for money as a financial asset and store of wealth, which depends on interest rates and is downward sloping

The asset demand for money is downward sloping

due to the opportunity cost of forgone interest payments when holding wealth as cash when interest rates are high as opposed to interest bearing assets

The total money demand is therefore

Downward sloping and shifted to the right by the transactions demand. Money GDP changes shift this curve

The RBA is

The banker to the banks that controls note issue, government banking and the employment of monetary policy

Banks have a reserve ratio which is

the reserves that banks are required to maintain divided by the banks deposit liabilities

Any more held cash are known as

excess reserves

Banks may loan out these excess reserves which results in

the creation of money when deposits are created for the borrower in exchange for the IOU (loan) to the bank

In a multibank system

This created money may then be desposited and loaned out repeatedly, creating more and more money

In general the amount of money created is given by

The monetary multiplier m = 1/reserve ratio

If reserves are withdrawn

The reverse effect can also take place by a factor of the money multiplier

Possible leakages of the money roll-on include

Currency drains (cash payments remaining in circulation), transfer to NBFI's or larger excess reserves

Borrowing is likely to be low during

recession, which causes the full multiplier effect to not take plcae

Banks may affect recession or inflation by

holding back or increasing credit creation and thus affecting the economy