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What is the primary purpose of holding money in cash or checking accounts for transactions?
What is the primary purpose of holding money in cash or checking accounts for transactions?
Holding money in cash accounts allows individuals to earn interest.
Holding money in cash accounts allows individuals to earn interest.
False
What are precautionary reasons for holding money?
What are precautionary reasons for holding money?
Unplanned spending and unexpected expenses.
The cost incurred to convert cash back to spendable money is known as a __________.
The cost incurred to convert cash back to spendable money is known as a __________.
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Which scenario best illustrates the need for precautionary money demand?
Which scenario best illustrates the need for precautionary money demand?
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Match the parts of money demand with their explanations:
Match the parts of money demand with their explanations:
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If a bond costs $5 to cash and returns $2 in interest over a week, a person would likely keep their $100 in __________ instead of cashing the bond.
If a bond costs $5 to cash and returns $2 in interest over a week, a person would likely keep their $100 in __________ instead of cashing the bond.
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Interest earned on bonds can outweigh the cost of cashing them in for spending.
Interest earned on bonds can outweigh the cost of cashing them in for spending.
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What is the total amount held in cash and bonds at the interest rate of 2%?
What is the total amount held in cash and bonds at the interest rate of 2%?
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As the interest rate increases, the demand for money for precautionary motives generally increases.
As the interest rate increases, the demand for money for precautionary motives generally increases.
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What is the opportunity cost of holding cash when investing in bonds?
What is the opportunity cost of holding cash when investing in bonds?
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If the interest rate increases to 3%, the amount held in cash will be _____.
If the interest rate increases to 3%, the amount held in cash will be _____.
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What yields 3·$3 = $9 in bonds during the 4th week's investment decision?
What yields 3·$3 = $9 in bonds during the 4th week's investment decision?
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Speculation primarily involves holding assets for long-term security.
Speculation primarily involves holding assets for long-term security.
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What is considered speculative behavior in finance?
What is considered speculative behavior in finance?
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Match the following terms with their definitions:
Match the following terms with their definitions:
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What is a defining characteristic of fiat money?
What is a defining characteristic of fiat money?
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The money supply refers specifically to cash that is held outside of banks only.
The money supply refers specifically to cash that is held outside of banks only.
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What does M1 specifically include in the money supply?
What does M1 specifically include in the money supply?
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Fiat money is valuable primarily because it is accepted as __________.
Fiat money is valuable primarily because it is accepted as __________.
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Match the following definitions or terms with their corresponding descriptions:
Match the following definitions or terms with their corresponding descriptions:
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Which of the following statements is true about the central bank?
Which of the following statements is true about the central bank?
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Paper money was first invented in Europe around the year 1000 AD.
Paper money was first invented in Europe around the year 1000 AD.
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Explain why fiat money does not have intrinsic value.
Explain why fiat money does not have intrinsic value.
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What does a high discount rate incentivize banks to do?
What does a high discount rate incentivize banks to do?
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The __________ is responsible for overseeing the monetary system in a country.
The __________ is responsible for overseeing the monetary system in a country.
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Open Market Operations (OMOs) are less predictable by the market than other methods of controlling money supply.
Open Market Operations (OMOs) are less predictable by the market than other methods of controlling money supply.
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What aspect of money supply includes relatively less liquid assets than M1?
What aspect of money supply includes relatively less liquid assets than M1?
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What is the primary purpose of Open Market Operations?
What is the primary purpose of Open Market Operations?
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The quantity of money that firms and households want to hold is known as _____ .
The quantity of money that firms and households want to hold is known as _____ .
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Match the monetary components with their descriptions:
Match the monetary components with their descriptions:
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Which of the following is NOT a reason for money demand?
Which of the following is NOT a reason for money demand?
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Money inflows and outflows for firms and households are always synchronized.
Money inflows and outflows for firms and households are always synchronized.
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What can the central bank set the money supply to through Open Market Operations?
What can the central bank set the money supply to through Open Market Operations?
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High discount rates decrease the _____ rate.
High discount rates decrease the _____ rate.
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A creditor benefits from inflation because they receive repayments at a higher value than the original loan amount.
A creditor benefits from inflation because they receive repayments at a higher value than the original loan amount.
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How does inflation impact individuals on fixed incomes?
How does inflation impact individuals on fixed incomes?
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In monetary policy, what does 'r' represent when plotting money supply?
In monetary policy, what does 'r' represent when plotting money supply?
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What are 'menu costs' associated with inflation?
What are 'menu costs' associated with inflation?
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Individuals who can adjust their incomes during inflation include __________, contractors, and entrepreneurs.
Individuals who can adjust their incomes during inflation include __________, contractors, and entrepreneurs.
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Match the following inflation scenarios with their outcomes:
Match the following inflation scenarios with their outcomes:
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What happens to a bond's price when interest rates rise?
What happens to a bond's price when interest rates rise?
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A bond contains fixed interest payments known as coupons.
A bond contains fixed interest payments known as coupons.
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What is the face value of a bond?
What is the face value of a bond?
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A bond is a _______ for the payment of a debt.
A bond is a _______ for the payment of a debt.
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If a bond with a $10 coupon is sold for $125, what is its interest rate?
If a bond with a $10 coupon is sold for $125, what is its interest rate?
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When the price of bonds decreases, speculators want to buy bonds.
When the price of bonds decreases, speculators want to buy bonds.
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What happens after the expiration of a bond?
What happens after the expiration of a bond?
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The demand for money is negatively related to the _______.
The demand for money is negatively related to the _______.
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Which of the following factors can shift money demand?
Which of the following factors can shift money demand?
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Match the types of money demand with their descriptions:
Match the types of money demand with their descriptions:
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Speculators prefer to hold more bonds when bond prices are high.
Speculators prefer to hold more bonds when bond prices are high.
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What is the relationship between bond prices and interest rates?
What is the relationship between bond prices and interest rates?
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When public safety is at risk, money demand tends to _______.
When public safety is at risk, money demand tends to _______.
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What does an increase in prices do to money demand?
What does an increase in prices do to money demand?
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Study Notes
Lecture 9: Money & Banking
- Global GDP is approximately 80trillionannually,whilethetotalglobalmoneysupplyisaround80 trillion annually, while the total global money supply is around 80trillionannually,whilethetotalglobalmoneysupplyisaround6 trillion.
- Money isn't a good or service, and its face value isn't included in GDP.
- Money facilitates transactions, acting as an intermediary in the market system.
- Money is the common denominator in economic activity, converting all transactions into a monetary value.
Money
- The amount of circulating money is changing over time, not holding the same value for decades.
- Money is not always globally interchangeable (e.g., US currency won't work everywhere).
- Some assets are more useful in specific situations (e.g., gold in a desert, versus cash at a store).
- Money is now increasingly used in digital forms and less frequently in physical form.
Functions of Money
- Money is not income or wealth.
- A barter system requires a double coincidence of goods, quantities, and timing.
- Money's three primary roles are:
- Medium of exchange.
- Store of value.
- Unit of account.
Properties of Money
- Money is generally accepted as a medium of exchange.
- Various forms of money have existed throughout history (e.g., silver, gold, goats).
- Desired properties of money include general acceptance, portability, durability, controllable quantity, objective value, easy denomination, and difficulty to counterfeit.
Fiat Money
- Fiat money is legal tender by government decree, not backed by physical commodities.
- Its value is derived from the agreement to accept it as money.
Money Supply
- Money supply definitions vary based on asset liquidity.
- M1 (transactions money): cash and checkable accounts.
- M2 (broad money): M1 + fixed-term accounts + semi-liquid financial assets.
- M2 is generally more stable than M1.
- The central bank (CB) is the main operator for the monetary system.
Central Bank Functions
- The CB acts as a coordinator/regulator for banking systems.
- It assists banks in financial difficulty.
- It manages exchange rates and foreign exchange reserves.
- It clears inter-bank payments.
- It sets reserve requirements for financial institutions.
How Banks Create Money
- Banks keep a portion of deposits as reserves (required reserve ratio or RR).
- The rest is loaned out, creating new money.
- This process creates a multiple of the initial deposit, (1/RR)x Initial Deposit.
- This "money multiplier" (MM) amplifies the money supply.
How CB Controls the Money Supply
- There are four ways the CB controls the money supply:
- Printing/Withdrawing money.
- Changing the RR.
- Adjusting the discount rate.
- Open Market Operations (OMO).
- OMOs are considered the CB's primary tool for controlling the money supply—it's precise, flexible, and predictable.
Money Demand
- Money demand is the desired quantity of money held by individuals and firms.
- Transactions motive: holding money for everyday purchases.
- Precautionary motive: holding money for unexpected expenses.
- Speculative motive: holding money for profit opportunities related to financial assets (e.g., bonds).
- Money demand is inversely related to the interest rate.
Equilibrium Interest Rate
- The CB can set a desired interest rate by adjusting the money supply.
- A change in money demand (due to unexpected inflation) can shift the interest rate to a new point, requiring CB adjustments.
Monetary Policy and Money Supply/GDP
- Monetary policy is controlled by the Central Bank.
- Changes in money supply are correlated with changes in GDP and inflation.
Inflation
- Inflation occurs when money supply rises faster than real output.
- The difference between money supply growth and real GDP growth dictates the inflation rate.
- Unanticipated inflation creates uncertainty, distorts credit relations, and has social costs.
- Inflation is inversely related to unemployment.
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Description
Explore the key concepts related to money and banking in this quiz based on Lecture 9. Understand the functions of money, its role in the economy, and the dynamics of the global money supply. Test your knowledge on how money facilitates transactions and its various forms in today's market.
