Introduction to Economics 2 Dersi 5. Ünite Sorularla Öğrenelim

It is not economically appropriate to define the money by using some of its physical properties. Why?

We cannot define the money within certain limits it is a dynamic concept. It demonstrates a changing structure from community to community and even in the same community from time to time. Part of the objects we accept or use as money today will possibly be out of money definition in future due to the developments in e-trade via computer technology and internet. 

What are the three basic functions of money in an economic structure?

It serves as a medium of exchange, a unit of account and a store of value.

How does money serve as a medium of exchange?

Economic units exchange goods and services on hand with money, and use this money to buy goods and services they want. Money, as a medium of exchange, is a kind of tool simplifying and accelerating exchange process of goods and services.

What is barter economy? 

In a barter economy, people exchange the goods they produce with the goods they want to consume. If you produce bread and need cloth, meat and other goods, you had to contact with people who produce these goods and are willing to exchange bread with goods you desire.

What are the problems during a barter process?

You will experience two important problems during this barter process: First, the person having clothes on hand should need bread to make an
exchange with you. In other words, barter is linked to a double coincidence of wants, which occurs only when a trader is willing to exchange his/her product for what another offers. Second, you have to agree with each other on the rate of exchange – that is, how many breads should be exchanged for a t-shirt.

What does unit of account function of money refer to?

It refers to the common measurement unit in quantifying the value of goods and services.

What does store of value function of money mean?

Store of value function of money means that it ensures to keep purchasing power on hand.

What does commodity money mean?

Commodity money is the object which has a value when used as goods and which can also be used as medium of exchange. The best example of commodity money is gold.

What does fiat money mean?

The objects having no value as goods but referring to a value in purchasing goods and services are called as fiat money. The paper pieces we use as medium of exchange today has no value as goods. But these papers in your pocket refer to an amount of value equal to the numbers printed on it in purchasing goods and services.

What is the idea in Gresham’s Law?

Gresham’s Law states that the bad money drives out the good money in the market. For instance, if both gold and silver coins are in use
(in circulation) at the same time, an interesting situation emerges. Since gold as a commodity has a greater value than silver, nobody wants to spend coins in his/her pouch and everyone tries to spend silver coins first. If everybody behaves like that, the money passing from hand to hand will be silver coins and gold coins will stay in people’s pouch. If we call silver coins as bad money and gold coins as good money, we can easily say that bad money drives out good money in the market. 

What are the three types of money in a modern economy?

• Coins
• Banknotes
• Demand deposits

What is demand deposit?

It is the type of money which you can withdraw anytime from a commercial bank. hey can be withdrawn anytime and can be used via checks and credit card.

What is liquidity?

Liquidity is the speed and easiness of an asset to convert currency or demand deposit or any other payment tool.

What is the difference between time deposits and demand deposits?

Demand deposits can be withdrawn anytime and can be used via checks and credit cards. But time deposits can be withdrawn from bank only after a certain time. Therefore, you can not use your time deposits to make any payment. If you have a time deposit in a bank, you cannot make a payment by writing a check like in demand deposits.

What does near (or quasi) monies refer to?

Near money is an asset which has a high liquidity but cannot be used directly in payments.

What does M1 refer to?

M1 is a monetary aggregate which consists of currency in circulation plus total demand deposits in banking system. It is also known as
narrow definition of money supply.

What does M2 refer to?

M2 is a monetary aggregate which consists of M1 plus total time deposits in banking system (also known as broad definition of money supply).

What does M3 refer to?

M3 is a monetary aggregate which consists of M2 plus repo accounts, money market funds and debt securities issued.

What is the function of a bank?

Bank is a financial institution which basically operates by accepting deposits from people and loaning these collected funds to firms and people and investing securities.

What is the meaning of reserves? 

Reserves are the sum of cash in bank’s vault and demand deposits in central bank and other banks.

What kind of a banking system is fractional reserve banking?

Fractional reserve banking can be defined as a banking system in which banks hold an amount of money less than their deposit debts as reserve.

What does money demand refer to?

Money demand is the quantity of money that economic agents want to hold.

What does transaction demand for money mean?

Transaction demand for money is the quantity of money that economic agents want to hold with the intent of spending for goods and services.

What does precautionary demand for money refer to?

Precautionary demand for money is the quantity of money that economic agents want to hold with the intent of defraying unforeseen expenses.

What does speculative demand for money refer to? 

Speculative demand for money is the quantity of money that economic agents want to hold because of price uncertainty of financial assets other than money.

What does velocity of money refer to?

Velocity of money is the number that represents, on average, how many times one unit of money is used for purchasing final goods and services.

What does neutrality of money refer to?

Neutrality of money is the phenomenon indicating that changes in quantity of money do not have any effect in production amount (or real variables of the economy) but affect only in prices.

What do general tools of monetary policy refer to?

General tools of monetary policy are tools that central banks use to direct reserves of banking system in a country consisting of required reserve ratios, discount rates and open market operations.

What do open market operations refer to ?

Open market operations are central bank’s purchasing and selling transactions of government securities in interbank market in order to affect the level of banking system’s reserves and, therefore, supply of money.