Money Creation

Question 1

what are the three types of money

Answer 1

currency
bank deposits
central bank reserves.

Question 2

differentiate between a financial asset and non financial asset

Answer 2

A financial asset is a claim on someone else in the economy, an IOU to a person, company, bank or government. Example, 20 pound note.

Assets that are not claims on someone else in the economy, and are valuable because they can be used to produce goods and services. Examples include houses, land, and machinery.

Question 3

what are the functions of money

Answer 3

Store of Value
Unit of Account
Medium of Exchange

Question 4

what are the two methods of money creation

Answer 4

credit multiplier
endogenous approach

Question 5

discuss the credit multiplier approach of money creation

Answer 5

loans are provided whenever actual reserve ratio is greater than required reserve ratio, which is a result of the decision of the central bank to increase the reserves of commercial banks

Question 6

discuss the endogenous approach

Answer 6

Commercial banks provide loans by creating deposits, without being necessary to hold excess reserves before they do so, determined by the decisions of commercial banks and the demand for loans from households and firms.

Question 7

discuss the limits of money creation by banks

Answer 7

market forces
constraints from households or businesses
monetary policy eg quantitive easing