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Econ 315 midterm
Terms in this set (24)
Meaning of money.
ANYTHING that is universially accepted in payment for goods or services or in the repayment of debts. Currency is money but money is not limited to currency.
What does money do? Functions of money.
Money functions as a medium of exchange, as a unit of account, and as a store of value.
Why is money the most liquid asset?
Liquidity equates to convertibility. Money (currency and other assets that can be quickly and easily converted to currency) is highly liquid because you can quickly convert it to practically anything in a very short period of time.
What is commodity money?
Commodity money is made up of previous metals or another valuable commodity.
What is fiat money?
Fiat money is paper money decreed by governments as legal tender but not convertible into coins or precious metals.
What is the money supply?
The amount of money floating around in the economy and available for spending.
What is inflation?
Inflation is the percentage rate in which price levels rise in the economy.
Why do we measure changes in the money supply?
The money supply provides insight about the near-term condition of the economy and determines the level of prices, interest rates, and inflation for the near term.
What is M1 and its components?
M1 measures the most liquid components of the money supply. M1 contains currency and assets that can be quickly and easily converted into currency like demand deposits.
What is M2 and its components?
M2 measures M1 plus "near money", highly liquid assets that are not currency like savings deposits.
What is the relationship between money supply and interest rates?
Money supply and interest rates are inversely related. A larger money supply lowers market interest rates and vice versa.
What is the relationship between money supply and economic growth?
Money supply and economic growth are directly related, for the short-term if not new money had been introduced to the money supply. A large money supply leads to more consumption and borrowing.
What is the relationship between money supply and inflation?
Money supply and inflation are directly related. A large money supply means inflation tends to rise but only if new money is circulated into the present money supply according to the quantity theory of money.
Why are currency and checkable deposit money (demand deposits) money?
Currency and demand deposits are money (the most liquid and thus convertible) because they are universally accepted in payment for goods or services and in the repayment of debts
What is the link between the quantity of money and the price level? Quantity theory of money (QTM)
QTM states that the quantity of money is directly related to the price level. If the quantity of money doubles, the price level of goods and services sold doubles causing inflation.
What is the link between the money supply and the inflation rate? Quantity theory of money (QTM)
QTM dictates that the money supply and inflation rate
What is the bond market? What is traded in the bond market?
The bond market is otherwise known as the debt or credit market, considering it is a debt security. The bond market is divided between the primary and secondary market, primary being the issuing of new debt were as the secondary market is the buying and selling of existing bonds.
What is the stock market? What is traded in the stock market?
The stock market is otherwise known as the equity market, considering it is a equity security. The stock market signifies the initial issuing or trading of shares of public companies in either exchanges or over-the-counter markets.
How do activities in the financial markets affect individual wealth, business, and the economy?
The financial markets are far-reaching but vaguely translates into liquidity for investors, access to credit for companies, and the creation of jobs or elimination by way of automation to cut costs.
What is the derivatives market?
Like the name implies the derivative market is comprised of financial instruments, like futures and options, that derive from one or more underlying assets.
What is the foreign exchange market?
The foreign exchange market refers to the global decentralized exchange of currencies.
What is information asymmetry in the financial markets?
Information asymmetry involves one party in a transaction having more or superior information compared to the other party.
What is an adverse selection in relation to information asymmetry?
Adverse selection is the immoral behavior that takes advantage of privileged information BEFORE the transaction occurs.
What is a moral hazard in relation to information asymmetry?
Moral hazard is the immoral behavior that takes advantage of privileged information AFTER the transaction occurs.
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