Money

Question 1

Problems of barter system

Answer 1

1. Lack of double coincidence of wants, there is no exchange when one of the party does not like the another’s goods.
2. Lack of common measure of value, a large number of exchange ratios arise in barter system.
3. Lack of storing value, some goods may deteriorate in a short time, so they are not able to store the purchasing power.
4. Problems of divisibility.
5. Inconvenience, inconvenient to travel a long distance with heavy goods. 

Question 2

Functions of money

Answer 2

1. Medium of exchange, money serves as generally accepted medium of exchange.
2. Unit of account. Money measures the value of goods and services.
3. Store of value, the purchasing power of their output in money
4. Standard of deferred payments, future payment is expressed in terms of money. 

Question 3

Characteristics of good money

Answer 3

1. Generally accepted by public as a medium of exchange.
2. Durable, Must not perish or wear out easily, must be able to be used for a long period of time
3. Divisible, should be easily divided up into smaller amounts to allow people to make small value transaction.
4. Portable, money must be easy to carry because people may have to travel long distance for exchange.
5. Limited supply, money must be limited in supply so as to maintain its purchasing power.
6. Homogenous, each unit must be identical in its physical quality and appearance with others of the same kind. 

Question 4

Three tier banking structure

Answer 4

Tier one: licensed banks
Current deposit, saving deposit, Time deposit and NCD held by public. Minimum $300 million

Tier two: restricted license banks
Time deposit and NCD held by public.
Amount of deposit must be larger or equal to 500,000 and minimum is 100 million
Tier three:  deposit-taking Companies. Fixed deposit and NCD held by public. Amount of deposit is larger or equal to 100,000. Must be more or equal to 3 months. Minimum need to pay 25 million.

Question 5

Why is money supply often a few times more than monetary base?

Answer 5

Under a fractional reserve banking system, banks are required to keep only a fraction of
their deposits as reserves.
They can create credit by lending out the remaining fraction in the form of loans to
businesses and private individuals,
which would eventually find their way back into the banking system in the form of
deposits
resulting in a multiple increase in deposits.

Question 6

Under what situation will money supply be equal to monetary base?

Answer 6

If the legal reserve ratio is 100% (RRR = 1)
or
if all of the banks decide not to lend out their excess reserves even when RRR < 1 (e.g.,
during financial crisis, when default rates are high),
the money supply will be equal to the monetary base.

Question 7

Why is money supply often a few times more than monetary base?

Answer 7

Under a fractional reserve banking system, banks are required to keep only a fraction of
their deposits as reserves.
They can create credit by lending out the remaining fraction in the form of loans to
businesses and private individuals,
which would eventually find their way back into the banking system in the form of
deposits
resulting in a multiple increase in deposits.

Question 8

Describe the process of deposit creation which may result from cash deposits.

Answer 8

When someone deposits into a bank, the bank will have excess reserve. The bank lends out its excess reserves, it will create deposits for another bank. it means that one banks loan will create other banks deposit. When the above process goes on continuously credit creation will be resulted.

Question 9

Describe the process of deposit contraction which may result from withdrawal.

Answer 9

When someone withdraw from a bank, the bank will have shortage of reserve. The bank has to call back loan for the deposit then the deposit of another bank will decrease. It means that one bank loan will create other banks deposit when the above process goes on continuously credit contraction will be result.

Question 10

Explain with two reasons why withdrawal does not necessarily lead to deposit
contraction in reality.

Answer 10

Banks may have enough excess reserves to meet the withdrawal demands, so that there
is no need to call back loans.
The public may choose to reduce their cash holdings instead of further withdrawing
bank deposits when their loans are being called back.

Question 11

Credit creation assumptions

Answer 11

1. Fractional reserve banking system, all banks are required to keep a fraction of their deposits as reserves.
2. no excess reserve
3. No cash leakage
4. Unlimited demand for loanable funds.