Money and the monetary system

Question 1

What are economic units?

Answer 1

Economic units or groups viewed in the aggregates, i.e. in total such as businesses, firms governments and individuals

Question 2

Define a surplus economic unit

Answer 2

A surplus economic unit generates more money than it spends resulting in excess money to invest or save

Question 3

Define ad deficit, economic units

Answer 3

Generates less money than it spends, resulting in need for additional money, therefore obtain money from surplus economic units

Question 4

Define the savings investment process

Answer 4

Involve the direct or indirect transfer of individual savings to a business institutions in exchange for debt and equity securities of the firm

Question 5

What is the direct process?

Answer 5

Savers directly use money to purchase a debt or equity securities of a firm in the financial markets

Question 6

What is the first indirect process?

Answer 6

Financial institutions first facilitate the process by purchasing securities issued by the corporation, and then reselling the securities to savers

Question 7

What is the second indirect process?

Answer 7

Savers deposit money to financial institutions, i.e. investment, banks, or insurance companies, the financial institution issues its own securities to the savers. the bank then loans money to business firms and exchange for that firm’s securities

Question 8

What is the function of the monetary system?

Answer 8

The monetary system exists in order to carry out the financial functions of creating and transferring money

Question 9

What are the functions of central bank?

Answer 9

Central banks are essential for defining and regulating money supply, as well as facilitating the transfer of money through clearing checks and processing them

Question 10

Describe how the banking system creates money

Answer 10

An individual bank cannot create money. However, the banking system can assume that first bank receives $1000 from ABC firm into a checking account. This £1000 dollars are reserves first bank keeps a percentage of these reserves i.e. 20% or $200, then lend out the remaining $800 to XYZ firm when XYZ firm deposits the 800 into last bank initial $1000 has increased to $1800. Therefore as long as deposit money comes into the banking system more deposit money is created.