Money and banking

Traps in Money and banking

• Inflation misconceptions
  Demand-pull: too much money chasing few goods. Cost-push: rising costs. Debtors and holders of real assets gain; creditors and fixed-income earners lose.
• Reverses the direction of the effect
  Trace the chain step by step (e.g. buying securities → banks gain cash → money supply rises) and check the sign at every link.
• Picks a closely related concept
  Learn related terms as contrasting pairs with one-line definitions, and identify which one the stem describes.
• Confuses monetary and fiscal policy tools
  Monetary (central bank): interest/policy rate, open market operations, reserve requirements. Fiscal (government): taxation and public spending, budget deficit/surplus.
• Confuses functions of money
  Medium of exchange removes double coincidence of wants; unit of account measures value; store of value keeps purchasing power over time; standard of deferred payment settles future debts.
• Division of labour misconceptions
  Advantages: skill, speed, use of machinery. Disadvantages: monotony, loss of craftsmanship, interdependence. Limited by the size of the market.
• Confuses scale of preference, wants and choice
  Wants are unlimited; resources are scarce → choice. A scale of preference ranks wants in order of importance. Free goods (air) have no opportunity cost; economic goods are scarce and command a price.
• Stops at a different economic quantity
  Underline what the question asks for and check the final number is THAT quantity, not a step on the way.
• Turns the formula upside down
  Learn the formula with its meaning: elasticity = responsiveness of QUANTITY, so %ΔQ is on top; k = 1/MPS = 1/(1 − MPC).
• Uses the wrong arithmetic operation
  Write the definition in words first (TR = price × quantity; ATC = TC ÷ Q) and only then put in numbers. Check units: totals and averages cannot be added.
• Uses the wrong base in a ratio
  Percentage change = change ÷ ORIGINAL value. Unemployment rate = unemployed ÷ LABOUR FORCE (employed + unemployed). Write the base before dividing.
• Confuses tax systems
  Look at the AVERAGE rate: rises with income = progressive; falls = regressive; constant = proportional.
• Exchange rate misconceptions
  Devaluation lowers the value of the home currency: exports become CHEAPER abroad and imports DEARER at home. Success needs elastic demand (Marshall–Lerner).
• Gives only part of the answer
  List every component in the definition (GDP = C + I + G + (X − M)) and tick them off before answering.
• Uses the everyday meaning of a term
  Economic terms have precise definitions. Recall the textbook definition before matching.
• Confuses central and commercial bank functions
  Central bank: issues currency, banker to government and banks, lender of last resort, monetary policy. Commercial banks: deposits, loans, payments for the public.
• Misreads price ceilings and floors
  A maximum price set BELOW equilibrium causes shortage (black markets); a minimum price ABOVE equilibrium causes surplus.