Econ1020 Money Is the Assets That People Are Willing to Receive in Exchange for G&s for Payments

Econ1020

Part B question:

1. Money

1. Definition: money is the assets that people are willing to receive in exchange for G&S for payments.
2. Narrow definition: currency + M1
3. Broader definitions: M3 & broad money

 2. type of money:

1. currency: notes and coins held in non-bank private sector
2. M1: currency + the value of all demand deposits with bank operating in Australia
3. M3: M1+ all other deposits (term deposits) with banks operating in Australia
4. Broad money: M3+ deposits into non-bank deposits-taking institution – currency and deposits of non-bank depository corporation.

3.Function: unit of account, store of value, medium of exchange, (standard of deferred payment)

4. Explain how commercial banks create money.                                                      

When a bank has excess reserves, it can lend up to their value.  (A bank does not lend its deposits; these remain inside the bank.)

When the loan is used to pay for something, funds are transferred by the borrower into the deposits of somebody else.

The payment clears when bank reserves move from the first bank to the second. A bank loan becomes money when it is deposited in the second bank.

Transferrable deposits are part of the stock of money (M=CU+D).

Total deposits have thus risen.

5. quantity theory of money:

M V =P Y

1. Velocity of money: the average number of time each dollar in money supply is used to purchase G&S included in real GDP.
2. If V is constant, then QTM implies that:

       Inflation rate = growth rate of M – growth rate of Y

(If the money supply grows faster than real GDP, there will be inflation.)

6. in the long run, if M increase, what will happen?

MV=PY

M=money supply, V= velocity of money, P=price level, Y= real output.

Due to constant V, in the long run, the increased money supply can not increase real output, rather to maintain the equality. An increase in M can improve the price level.