12 (money & banking)

Question 1

Uses of money

Answer 1

medium of exchange, unit of account, store of value.

Question 2

M1 vs M2

Answer 2

M1 is paper money and checking accounts, M2 is paper money, checking and savings accounts, shares in money market funds.

Question 3

Required Reserve Ratio

Answer 3

minimum of cash needing to be kept on hand in proportion to total deposits.

Question 4

Oversimplified money multiplier formula

Answer 4

Change in money supply = (1/RRR) * change in reserves. Need to be careful about not double counting the initial deposit.

Question 5

Why is the money supply expansion formula overstated?

Answer 5

Banks will hold more than the bare minimum of required reserves. Individuals will not keep all the money they are loaned in a checking account.

Question 6

What simplifying assumptions does bank stuff rely on?

Answer 6

RRR is fixed, Banks hold 0 excess reserves, no leakages from banking system. (we also pretend like there is only one bank but that doesn’t actually matter).

Question 7

Why don’t bankers make max loans in real life?

Answer 7

Have to balance risk and reward. At low interest rates, won’t wan’t to make risky loans.

Question 8

Money Supply Curve

Answer 8

Upward sloping because banks want to loan more money out when the interest rate is higher.