44 : Money and banking

Question 1

Explain unit of account

Answer 1

use of money to establish value of a product
(express value as price in money terms)

Question 2

2 types of money

Answer 2

1. narrow money
   (money as medium of exchange, notes in circulation, cash held in banks)
2. broad money
   (narrow money + money as store of value)

Question 3

Quantity Theory of Money

Answer 3

MV=PT
assume V, T (transactions) constant
Money supply directly proportional to price level

Question 4

Keynesian approach to money supply

Answer 4

Market forces dont guarantee full employment, favour government intervention ( increase gov spending during high unemployment)

Question 5

Monetarist approach to money supply

Answer 5

Gov reduces unemployment by increasing spending will cause inflation.
Gov reduces inflation by reducing money supply.

Question 6

2 types of deposit accounts

Answer 6

1. Demand deposit acc (current acc)
2. Savings deposit acc (bank pay interest)

Question 7

Define loan

Answer 7

sum of money lent at agreed rate of interest for a period of time

Question 8

Define reserve ratio

Answer 8

Proportion of liquid assets to total liabilities

Question 9

Define capital ratio

Answer 9

A bank’s available financial capital as percentage of riskier assets. (Eg risky loans)

Question 10

3 objectives of commercial banks

Answer 10

Profitability
Liquidity
Security

Question 11

4 causes of change in money supply by banks

Answer 11

1. Increase commercial bank lending
2. Increase gov spending financed by borrowing from banks
3. Sell gov bond to private sector financial institutions
4. Net inflow of currency