İKTİSADA GİRİŞ II

The best way to understand the function of money as a medium of exchange is to consider an environment having no common instrument for exchanging. In such an environment, goods and services would be exchanged with other goods and services. So, in such environments there would be a barter economy and people would Exchange the goods they produced with the goods they want to consume.

The necessity of double coincidence of wants and uncertainty about the rate of exchange in a barter economy cause inefficiency by preventing specialization in division of labor. Thus, since the barter requires too much time and to bargain other people one by one, it is not a desired way.

Serving as a Store of Value: The third function of money is to be a store of value. Money, as a store of value, ensures to keep purchasing power on hand.

The objects having no value as goods but referring to a value in purchasing goods and services are called as fiat Money.

Banks create money by collecting deposits from people and using them to make loans and investments. This money created in form of demand deposits as a result of banks’ credit transactions is called as deposit Money.

The reason you hold money in your wallet to buy something is that acquisition periods of income are generally not matching with spending periods. You have to hold an amount of money as much as the amount you wish to spend. The other factor determining the amount of money you want to hold is prices.

The most important property of indirect channel concept suggested by Keynes, is the existence of alternative financial assets instead of holding money.

Classical economists insist that factors that determine the velocity are people’s habits to spend and to pay.

If economy recovers more than required and there are signs of inflationary threats, monetary authorities would decide to slowdown the money supply and to increase interest rates.

Open market operations are the purchasing/selling of government securities (government bonds and treasury bills) in the money market. The goal of purchasing/selling operations performed by the central bank in the market is to expand/restrict the reserves of the banking system.

Money, as a store of value, ensures to keep purchasing power on hand. For example, you hold an amount of purchasing power equal to the amount of money in your pocket right now. If you have 20 TL in your pocket, you can imagine your purchasing power by thinking about the goods and services you may purchase with this amount of money and understand this function of money easily. This function of money is closely related with the prices of goods and services in the country. For instance, if all prices double right now, the amount of goods and services you can purchase with the money in your pocket cut in half. In other words, your purchasing power with the money in your pocket halves. Contrary, if all prices of goods and services are lowered, then you can purchase more goods and services with the money in your pocket, meaning that your purchasing power increases.

The correct answer is E.

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.

The correct answer is B.

Near or quasi money is an asset which has a high liquidity but cannot be used directly in payments. 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. Therefore, time deposits are excluded from types of money, and are considered quasi money.

The correct answer is A.

Deposit money is money in the form of demand deposit that is created by banks as a result of accepting deposits and loaning of funds.

The correct answer is D.

If nominal income increases from Y0 to Y1, money demand increases from Md0 to Md1and money demand function shifts rightward. In case of a nominal income decrease from Y0 to Y2, money demand decreases from Md0 to Md2and money demand curve shifts leftward. When money demand curve shifts from Md0 to Md1, amount of money demand in the interest rate of 9 percent increases from 600 TL to 800 TL. On the contrary, when money demand function shifts to the left from Md0 to Md2, the amount of money demand decreases from 600 TL to 400 TL.

The correct answer is E.

In order to determine equilibrium interest rate and quantity of money in the economy, we can combine the functions of money demand and money supply. The below figure intends this and shows how money market equilibrium is realized. Equilibrium is obtained at the intersection point of the functions of money demand and money supply. The point at which demand for money is equalized to supply of money is called as equilibrium point and is indicated letter e in the figure. This equilibrium point in the figure shows that equilibrium interest rate and money stock are 9 percent and 600 TL, respectively.

Reviewing the factors ensuring the money market equilibrium helps to understand why it is in point “e”. To understand what would happen in case of interest rate being not at the equilibrium point, let’s consider the figure again. If interest rate reduces below the equilibrium level, there will be excess demand for money.

The correct answer is A.

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.

The correct answer is D.

The Central Bank has some tools to direct the reserves of banking system in the country. The numbers and types of these tools are determined by the structure of country’s financial system and the legislative regulations. There are three tools namedgeneral tools of monetary policy that central banks can use for this purpose: Required reserve ratio, discount rate and open market operations.

The correct answer is C.

In an environment where central bank would like to slowdown the accelerating trends in inflation, it should slowdown the money supply; that is, following a tight monetary policy. Therefore, it is required to stop the rise in banks’ reserves. As you remember, since a decrease in bank reserves reduces the volume of deposit money created by banks, the rise of money supply will slowdown, as well.

The correct answer is E.

When central bank purchases government securities in the market, it transfers reserves to banks and this is the beginning of deposit money creation process. Thus, when central bank wants to accelerate the raise in money supply, it will directly increase the reserves of banking system by making open market purchasing in the market. On the other hand, if central bank starts to sell government securities, it will withdraw reserves from banking system. This reduces the amount of deposit money that banks can create. Thus, when central bank wants to decelerate the raise in money supply, it will directly decrease the reserves of banking system by making open market sale in the market.

The correct answer is D.