Skill: Recognition 3) Which of the following is a primary function of money? A) to serve as a unit of account B) to serve as an encouragement to work C) to reduce the burden of excessive imports D) to raise funds for the government Answer: A Topic: What is Money? Skill: Recognition 4) Barter is A) another type of money. B) printing too much money. C) the exchange of goods and services directly for other goods and services.
In order to combat this deficit spending, taxes are increased to generate more revenue to pay off this spending. In response, consumers will spend less money and save more, thus causing a decrease in consumption and less money in the economy. Soon, there is a decrease in investment because products are not being sold. Prices drop, and the economy lowers into a recession.
It achieves this through a process known as the transmission mechanism, which occurs in a number of distinct stages: - Purchasing and sale of government bonds in the STMM to influence the cash rate - Changes in the cash rate influence other interest rates, particularly short term securities, such as bank bills. In this way, changes in monetary policy are usually translated into the rates that banks charge for lending. - These lending rates then influence the decisions of businesses and household to borrow and spend, as seen in Figure 1, providing a key channel for transmitting monetary policy to the real economy. 3. Explain the possible impacts of loose monetary policy on the value of the exchange rate and on economic growth in Australia The effect of an expansionary monetary policy is to lower the exchange rate, weaken the financial
This is unlikely to be the case in the UK at the moment as low interest rates and a large budget deficit has not cause significant inflation. A further conflict with loose demand side policies might the effect on the current account. With higher economic growth and consumption, we might expect an increase in the demand for imports and a worsening of the current account. This is likely to be a fairly significant effect for the UK because it has a high marginal propensity to import – especially for manufactured goods. Furthermore, if there is inflation from the demand side policies then there will be a fall in UK competitiveness and a
When examining the balance sheet of a typical company you would see categories such as inventory, accounts payable, or accounts receivable, in a commercial bank balance sheet under assets you would find areas like loans and investments, and under liabilities you would find categories such as deposits and borrowings. This is a large factor in which separates the final statements of commercial banks and the final statements of your everyday company. Commercial banks accept various types of deposits from their clients; they then provide those funds to borrowers such as homeowners and small businesses, in which they can receive interest on these loans. They gain profit from the difference between the rate they pay for funds and the rate that they receive from the borrowers. The goal of the bank is to create a flow of funds so from the many deposits, the bank can lend out to a wide variety of borrowers and this creates the flow of funds, which is crucial in the banking system.
This is where the idea of currencies came into play. Today we use a system that we call an economy that determines the value of currencies across the world, and the value of goods. This is how we have arrived to the point we are currently at, using coins and bills to represent value, and to conduct trade. So, what is the true value of our money, and are our bills simple just paper? If we look at a physical definition of a dollar bill it is indeed just paper.
Slowly people began to create “money” and trade a certain amount of money for a commodity. However, nowadays, we have a system of capitalism. In this system someone buys a commodity in order to make a profit off of selling the same commodity. This system can be explained through the meaning of surplus value. Surplus value, in its most basic definition, is the amount of money earned by the capitalist after paying for overhead.
More reserves are held in their account at the central bank. With these additional reserves, they can expand credit and create more money. (Bagus 2011) The FED is more passionate than the ECB about cutting interest rates to boost the economy. The ECB main goal is to keep inflation low, while the FED fights a double battle with not only fighting inflation but also unemployment. More things can affect how the ECB reacts when I comes to inflation and mostly targets a broader price index that includes things that doesn’t bother the FEDs as much, such as the Libya-related oil spike in 2011.
These are all part of a balancing act that needs to be monitored constantly to ensure that the domestic and national economy stays in good standings. The advantages to international trade can be found evident when the public chooses a good that cannot be produced locally such as coffee which must be brought in from either South American or Colombia. Foreign exchange rates involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. There are a number of influences that affect the foreign exchange rate which are government intervention, relative interest rates, commercial crisis, trade imbalances, and abnormal financial transactions. Trade imbalances refers to a trade deficit between two countries, this can affect those two countries currency exchange rates.
There are two types of Fiscal policy put in place to alter the level of aggregate demand; Expansionary fiscal policy and Contractionary fiscal policy. When an economy is in a recession, expansionary fiscal policy is in order. Typically this type of fiscal policy results in increased government spending and/ or lower taxes. A recession results in a recessionary gap meaning that aggregate demand is at a level lower than it would be in a full employment situation. In order to close this gap, a government will typically increase their spending which will directly increase the aggregate demand curve (since government spending creates demand for goods and services).