Monetary Economics Study Guide

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29 Questions

What is the primary function of financial markets?

To facilitate the transfer of funds from those who have excess to those who have a shortage

What is a security in the context of financial markets?

A claim on the issuer's future income or assets

What is the interest rate, in economic terms?

The price of borrowing or the rental cost of funds

What is an example of a debt security?

Bond

What does a stock represent in a corporation?

A share of ownership in the corporation

What is the primary role of central banks in the conduct of monetary policy?

To manage the money supply

What is the main issue with the liquidity approach in categorizing assets?

It is unclear where the cutoff point lies along the asset-liquidity continuum

What is the name for the categories defined by the Central Bank in Malaysia?

Monetary aggregates

What is included in the M1 category of monetary aggregates?

Currency, transactions deposits, and traveller's cheques

What is the definition of monetary base?

The quantity of government-produced money held by the public and reserves in depositary institutions

How many categories of money supply are defined by the Central Bank in Malaysia?

3

What is the relationship between M1, M2, and M3?

They are categorized using a mixture of transactions and liquidity approaches

What is the primary reason economists often group interest rates together?

Because interest rates tend to move in unison

What is the relationship between aggregate income and aggregate output?

Aggregate income is equal to aggregate output

What is the definition of money in economics?

Anything that is generally accepted as a medium of exchange or in the repayment of debts

What is the difference between nominal and real values?

Nominal values are calculated using current prices, while real values are calculated using constant prices

What is the term for the total production of goods and services in a country?

Aggregate Output

What is the definition of the business cycle?

The upward and downward movement of aggregate output produced in the economy

What is the primary purpose of having different measures of money supply?

To capture the complexities of money's role in the economy

Which of the following definitions of money supply is most appropriate if the most important function of money is its role as medium of exchange?

M1, which includes only the most liquid assets, such as cash and checking accounts

According to the circular flow model of income in a four-sector economy, what is the primary role of money in economic activities?

To facilitate the flow of goods and services

What is the main limitation of electronic money, according to the statement 'Electronic money cannot perform all the functions of money'?

It is not a store of value

What is the role of money in determining the price level, according to the explanation of the role of money in the economy?

Money influences the price level by increasing the demand for goods and services

What percentage of M1 consists of demand deposits?

60%

What is included in M2, in addition to M1?

Fixed and savings deposits at commercial banks

What is the difference between M2 and M3?

M3 includes deposits at finance companies, while M2 does not

Why is it necessary to have more than one measure of money supply?

To account for different types of deposits and institutions

What is the relationship between M1, M2, and M3?

M1 is a subset of M2, and M2 is a subset of M3

What type of deposits are included in M2, but not in M1?

Fixed and savings deposits at commercial banks

Study Notes

Introduction to Monetary Economics

  • Monetary economics studies the interactions between financial markets, banking, and the economy.

Financial Markets

  • Financial markets are where funds are transferred from those who have excess funds to those who have a shortage.
  • Examples of financial markets include stock markets, bond markets, and money markets.

Security

  • A security is a claim on the issuer's future income or assets.
  • Examples of securities include bonds and stocks.

Interest Rate

  • Interest rate is the price of money or the cost of borrowing.
  • There are many interest rates in the economy, and they usually move in unison.

Money Supply

  • Money supply is the quantity of money available in the economy.
  • In Malaysia, the Central Bank (BNM) measures money supply into three categories: M1, M2, and M3.

Monetary Base

  • Monetary base is the quantity of government-produced money held by the public and reserves in depositary institutions.

M1: The Transaction Money (Narrow Money)

  • M1 includes currency (coins and notes), transactions deposits (demand deposits and other checkable deposits), and traveler's checks.
  • M1 is the most liquid form of money, making it easily accessible for transactions.

M2: The Broad Money

  • M2 includes M1, private sector's fixed and savings deposits with Bank Negara Malaysia and commercial banks, and other liquid assets.
  • M2 is a broader measure of money supply that includes less liquid assets.

M3: The Broader Definition of Money

  • M3 includes M2, deposits with finance companies, merchant banks, discount houses, and Bank Islam Malaysia Berhad (BIMB).
  • M3 is the broadest measure of money supply, including all types of deposits and liquid assets.

Importance of Multiple Measures of Money Supply

  • Having multiple measures of money supply is necessary because different measures capture different aspects of money's functions.
  • M1 captures the most liquid form of money, while M2 and M3 capture less liquid assets.

Functions of Money

  • Money serves as a medium of exchange, a unit of account, and a store of value.
  • Money plays a crucial role in determining real output, employment, the price level, and the interest rate.

Relationship between Money and Economic Activities

  • The circular flow model of income in a four-sector economy shows the relationship between money and economic activities.
  • Money flows through the economy, facilitating transactions and economic activities.

Test your knowledge of monetary economics with this comprehensive study guide covering topics such as financial systems, money and payment systems, interest rates, and central banking. Learn about the behavior of interest rates, risk and term structure, and the conduct of monetary policy.

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