Money Creation And Money Demand Flashcards
What is Money Creation?
The process by which money is produced or issued. It leads to the increase in money supply.
How to create money?
Currency issuance: physically manufacturing monetary units
Scriptural money creation: lending a monetary unit multiple times through reserve lending
What is a fractional reserve banking system?
A financial system in which some fraction of the deposits can be used to grant loans. The rest of the deposits is the required reserve.
What types of money are in a fractional reserve banking?
M0:Central bank’s money
M1: commercial bank’s money
What are the bank’s reserves?
Required reserves: reserve requirement ratio*deposits
Excess reserves: total legal reserves-required reserves
Legal reserves earn no interest income.
RR+ER=Legal Reserves
What is the money multiplier?
It is an instrument used to measure the total amount of money created by the banking system.
m=1/required reserve ratio
What is the relationship between M0 and M1?
m*M0=M1
What is money destruction?
The destruction of physically created money.
The destruction of money created by the banking sistem caused by paying back the loans.
What does the MS do in a growing economy?
It increases because the nr of new loans is always more than the nr of fully paid loans.
What is money demand?
It is the desire to hold financial assets in the form of cash or bank deposits.
What does the classical quantity theory claim?
As money supply goes up, so does nominal income, provided the velocity of money is constant.
If both the real income and the velocity are constant, the price level is determined by MS.
What does the Keynesian Theory affirm?
It states that people prefer to hold liquidity.
