Quiz 13: Deficits and Debt: the Austerity Debate

Business

Financial institutions are part of financial system of an economy, financial intermediary and depository institutions like banks, credit unions, etc. are part of it. Money is the most widely accepted medium of exchange The money needs to perform three functions, which are as follows: • Medium of exchange: The money should be widely accepted as medium of exchange for transactions to happen and it should not have any inherent value.• Store of value: The money should not• Unit of account: Money should have standardized value with respect to other goods and it should also be divisible.Whenever money is issued then the central banks issues that note as a promise to bearer i.e. the central bank or government has the liability to pay $1,000 to the bond bearer, so it becomes financial liability for government, and as the students who are the bearer hold the bond and promise, so it is financial asset for them.

Financial institutions are part of financial system of an economy, financial intermediary and depository institutions like banks, credit unions, etc. are part of it The formula for real interest rate is as follows: img The economy runs by infinite number of transactions happening all the times. Now, this transaction needs medium of exchange to run the economy smoothly, money becomes the most accepted medium now which helps for all the exchange happening in the market. If flow of money is stopped, then the financial transaction will no more happen and economy will not run smoothly, which is similar to function of oil for engine which helps moving all the parts smoothly and frictionless.

Financial institutions are part of financial system of an economy, financial intermediary and depository institutions like banks, credit unions, etc. are part of it. Money is the most widely accepted medium of exchange The money needs to perform three functions, which are as follows: • Medium of exchange: The money should be widely accepted as medium of exchange for transactions to happen and it should not have any inherent value.• Store of value: The money should not• Unit of account: Money should have standardized value with respect to other goods and it should also be divisible.a.Even when governments were not there, money existed though its form was different. If money is being controlled by private players, then there might be some social problems but economically it will be benefit because the money supply will always be kept optimal. Austrian economists have always believed that people are more capable than the government. b.The money can be supplied privately by going for a medium of exchange which satisfy the unit of account and store of value functions as well. Private players can create money if they are able to produce a medium which is widely accepted. The value of this medium or the money of the private players will be determined market exchanges and price-mechanism like of all other goods.