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Questions and Answers
What is the fraction called that is fixed by the central bank and is related to credit creation?
What is the fraction called that is fixed by the central bank and is related to credit creation?
Legal Reserve Ratio (LRR)
What happens when a bank accepts cash from a customer and deposits it under the customer's name into their account?
What happens when a bank accepts cash from a customer and deposits it under the customer's name into their account?
Primary Deposit
What is considered as a secondary or derivative deposit?
What is considered as a secondary or derivative deposit?
Every financial institution or bank is required to hold a certain amount of money as a reserve to ensure proper ____________.
Every financial institution or bank is required to hold a certain amount of money as a reserve to ensure proper ____________.
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What is the primary aim of the central bank?
What is the primary aim of the central bank?
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What is a key feature of the classical paradigm in macroeconomics?
What is a key feature of the classical paradigm in macroeconomics?
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Classical economists advocate for minimal government intervention in the economy.
Classical economists advocate for minimal government intervention in the economy.
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According to Robertson's definition, how is money defined?
According to Robertson's definition, how is money defined?
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_______ occurs when individuals choose not to work at the current wage rate and under the prevailing conditions in the labor market.
_______ occurs when individuals choose not to work at the current wage rate and under the prevailing conditions in the labor market.
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In the barter system, the lack of a coinciding wants between the buyer and seller could lead to difficulties in the exchange.
In the barter system, the lack of a coinciding wants between the buyer and seller could lead to difficulties in the exchange.
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Money was introduced to overcome the difficulties of the ______ system.
Money was introduced to overcome the difficulties of the ______ system.
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Match the following types of money with their descriptions:
Match the following types of money with their descriptions:
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What results from an increase in government spending or a tax reduction in the IS-LM framework?
What results from an increase in government spending or a tax reduction in the IS-LM framework?
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What is the impact of a decrease in government spending or a tax increase in the IS-LM model?
What is the impact of a decrease in government spending or a tax increase in the IS-LM model?
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Describe expansionary monetary policy within the IS-LM framework.
Describe expansionary monetary policy within the IS-LM framework.
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Explain contractionary monetary policy in the IS-LM model.
Explain contractionary monetary policy in the IS-LM model.
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What is the primary limitation of the IS-LM model?
What is the primary limitation of the IS-LM model?
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Name a noteworthy drawback of the IS-LM model related to its assumptions.
Name a noteworthy drawback of the IS-LM model related to its assumptions.
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What entity is responsible for managing monetary policy and regulating banks?
What entity is responsible for managing monetary policy and regulating banks?
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Governments are responsible for controlling monetary policy in a country.
Governments are responsible for controlling monetary policy in a country.
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What are the primary goals of central banks when managing monetary policy?
What are the primary goals of central banks when managing monetary policy?
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Central banks manage a nation's foreign exchange reserves to stabilize the currency's value and intervene in the foreign exchange market if necessary. They also supervise and regulate ______.
Central banks manage a nation's foreign exchange reserves to stabilize the currency's value and intervene in the foreign exchange market if necessary. They also supervise and regulate ______.
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Match the following entities with their respective responsibilities in the economy:
Match the following entities with their respective responsibilities in the economy:
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Study Notes
Money
- Definition: Money is the commonly accepted medium of exchange, occupies a unique place in an economic system, and is needed for various transactions undertaken by people and the government.
- Evolution:
- Derived from the name of Goddess Juno Moneta of Rome
- Initial stage: Animal was used as money, gradually replaced by metallic money, then coins, paper money, and credit money
Difficulties of the Barter System
- Lack of coincidence of wants: Buyer and seller must have a coincidence of wants, which is difficult to achieve
- Lack of store of value: Goods are perishable, require huge space and heavy transportation costs
- Lack of divisibility of commodities: Not all commodities are divisible, making exchange difficult
- Lack of common measure of value: No common measure of value makes exchange difficult
- Difficulty in making deferred payments: Future exchange involves difficulties, such as changes in value or quality of commodities
Types of Money
- Commodity money and representative money
- Commodity money: Face value and intrinsic value are the same (e.g., metallic coins)
- Representative money: Face value and intrinsic value are different (e.g., coins and paper money)
- Legal tender money and optional money
- Legal tender money: Must be accepted by law (e.g., coins and paper money)
- Optional money: Not compulsory to accept (e.g., cheques)
- Metallic money and paper money
- Metallic money: Made of metals like silver, nickel, and steel (e.g., coins)
- Paper money: Printed on paper (e.g., currency notes)
- Standard money and token money
- Standard money: Face value and intrinsic value are the same (e.g., gold standard)
- Token money: Face value is higher than intrinsic value, not convertible (e.g., Indian rupee)
- Credit money: Bank deposits that are repayable on demand and can be transferred through cheques
Supply of Money
- Stock concept: Money supply can increase or decrease over time
- Influence on economy: Affects interest rates, credit availability, investment, output, national income, and employment
- Components of money supply:
- Currency issued by the central bank
- Demand deposits created by commercial banks
Demand for Money
- Refers to the total amount of money individuals, businesses, and governments are willing to hold in cash or easily accessible forms
- Types of demand for money:
- Transactional demand: For everyday economic activities
- Precautionary demand: For unexpected events
- Speculative demand: Driven by investment foresight and market perceptions
Functions of Money
- Primary functions:
- Medium of exchange
- Measure of value
- Secondary functions:
- Store of value
- Transfer of value
- Standard of deferred payments
- Money creation or credit creation
Money Creation or Credit Creation
- Based on the creation of credit by commercial banks
- Banks use a part of their customer deposits to offer loans or lend money on credit
- Terms:
- Primary deposits: Cash deposited by customers
- Secondary or derivative deposits: Amount granted as loans to borrowers
- Excess reserves: Amount above the reserve requirements set by the authority
- Credit multiplier: Ratio of change in secondary deposits to change in primary deposits
- Money multiplier or credit multiplier: Influence of the central bank on money supply by modifying reserve rates
Integrating Money and Capital Markets
- Money market:
- Platform for short-term borrowing and lending of funds
- Features: Short-term instruments, high liquidity, low risk, regulated market, competitive interest rates, variety of financial instruments
- Functions: Makes short-term borrowing and lending easier, keeps the financial system running smoothly, sets short-term interest rates, sets a standard for other financial instruments, helps control risk, helps with monetary policy
- Commodity market:
- Platform for buying and selling commodities
- Features: Standardization, price discovery, low transaction costs, leverage, volatility, hedging, speculation
- Functions: Price discovery, risk management, price stabilization, liquidity, investment, market information
- IS-LM model:
- A macroeconomic tool that shows the interaction between interest rates and production within the money market
- Derived from "Investment Savings" and "Liquidity Preference-Money Supply"### IS-LM Model
- Also known as the Hicks-Hansen Model
- Explains the impact of changes in market preferences on market interest rates and GDP in equilibrium
- Components:
- Monetary and fiscal policy
- Liquidity preference
- Balance between investment and saving
Monetary Policy
- Involves the central bank's management of the money supply and interest rates to achieve macroeconomic goals
- Plays a pivotal role in influencing economic stability and controlling inflation
Fiscal Policy
- Encompasses government decisions on spending and taxation, directly impacting aggregate demand
- Serves as a potent tool for policymakers to navigate economic conditions and stimulate growth
Liquidity Preference
- Reflects individuals' inclination to hold cash rather than invest it
- This psychological aspect influences economic decisions and plays a role in shaping monetary policy
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Description
This quiz covers the significance of money in modern economic life, its definition, and its importance in daily transactions. Learn about the role of money in an economic system and its impact on society.
