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All Flashcards
What is Fiat Money?
Money declared legal tender by the government, not based on inherent value.
What is Commodity Money?
Money with intrinsic value, like gold or silver.
Define Medium of Exchange.
Money used to facilitate transactions, avoiding bartering.
Define Unit of Account.
Money provides a common measure of value for goods and services.
Define Store of Value.
Money's ability to hold its value over time.
What is Liquidity?
How easily an asset can be converted into cash.
Define M1.
Cash + Coins + Checking Deposits + Traveler's Checks.
Define M2.
M1 + Savings Deposits + Small Time Deposits + Money Market Deposits + Money Market Mutual Funds.
What is the Money Supply?
The total amount of money available in an economy (M1 and M2).
Define Monetary Base.
Physical currency in circulation + bank reserves.
What are the key differences between M1 and M2?
M1 includes the most liquid forms of money (cash, checking accounts), while M2 includes M1 plus less liquid assets like savings accounts and money market funds.
How does the monetary base differ from the money supply?
The monetary base is the foundation (currency in circulation + bank reserves), while the money supply is the total amount of money available in the economy.
Differentiate between fiat money and commodity money.
Fiat money has no intrinsic value and is declared legal tender by the government. Commodity money has intrinsic value, such as gold.
Compare money's role as a medium of exchange versus bartering.
Money simplifies transactions by acting as a universal 'go-between', while bartering requires a double coincidence of wants.
Contrast money's function as a unit of account versus a store of value.
As a unit of account, money provides a common measure of value. As a store of value, money retains its value over time.
How does the role of a central bank differ in a fiat money system compared to a commodity money system?
In a fiat money system, the central bank manages the money supply. In a commodity money system, the money supply is tied to the availability of the commodity.
Compare the stability of fiat money versus commodity money.
Fiat money's stability depends on the central bank's management. Commodity money's stability depends on the commodity's supply and demand.
Contrast the impact of inflation on fiat money versus commodity money.
Inflation erodes the value of fiat money. Commodity money may be less affected if the commodity's value rises with inflation.
Compare the ease of expanding the money supply with fiat versus commodity money.
It's easier to expand the money supply with fiat money, as it's not limited by a physical commodity. Commodity money expansion depends on commodity availability.
Contrast the role of public trust in maintaining the value of fiat money versus commodity money.
Fiat money relies heavily on public trust in the government. Commodity money's value is linked to the commodity's inherent worth.
How does 'medium of exchange' apply when buying groceries?
Using money to purchase groceries instead of directly trading goods.
How does 'unit of account' apply when comparing car prices?
Using money to compare the value of different car models.
How does 'store of value' apply to a savings account?
Money saved in a bank account retains its value over time.
Why are credit cards NOT considered money?
Credit cards are short-term loans, not a store of value or medium of exchange themselves.
Explain how liquidity impacts the classification of assets in M1 vs. M2.
M1 assets are more liquid (easily converted to cash) than those in M2.
If a country used gold coins, which function of money is most supported?
Store of value, because gold has intrinsic value and tends to hold its value over time.
How does hyperinflation affect money's function as a store of value?
Hyperinflation erodes money's ability to act as a store of value as its purchasing power rapidly declines.
Explain how the introduction of a widely accepted digital currency impacts the medium of exchange function.
It enhances the medium of exchange function by making transactions faster and more convenient.
How does the use of different currencies in different countries complicate the 'unit of account' function in international trade?
It requires currency conversions and introduces exchange rate risk, making it more difficult to compare prices.
Explain why real estate is not considered part of M1 or M2.
Real estate is not part of M1 or M2 because it is not liquid. It takes time to convert real estate into cash.