Economics: Money Supply and Reserve Requirements

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22 Questions

What is a key factor that affects the supply of money?

Changes in reserve requirements

What is the purpose of the money multiplier?

To measure the impact of reserve requirement changes on the money supply

What happens when the central bank lowers the reserve requirement?

Banks have more money to lend to others

What is the formula to calculate the money multiplier?

1 / R

Why might the central bank use the money multiplier?

To stimulate economic growth

What occurs when a bank loses reserves and deposits?

Another bank gains reserves

What is the total value of money in an economy over a period?

Money supply

What is included in the definition of money, aside from coins and banknotes?

Different monetary instruments

How do banks create money?

Through loans, using their excess reserves

What determines a bank's ability to create money?

The quantity of its excess reserves

How much can individuals and institutions borrow from a bank?

An amount equal to the bank's excess reserves

What is the primary function of a central bank, such as the Bangko Sentral ng Pilipinas?

To implement monetary policy

What is the purpose of a Depository Corporations Survey?

To monitor the money supply and banking system

What is the relationship between a bank's excess reserves and its ability to create money?

The more excess reserves, the more money the bank can create

What is the primary purpose of a central bank in measuring the money supply?

To formulate its own accounting definition

What is the money supply a measure of?

The aggregate amount of money in the economy over a particular period

Why were items like pebbles, shells, and gold used as money in the past?

Because they were widely accepted as a medium of exchange

What is the main difference between the money supply definitions used by different central banks?

The definitions differ from one central bank to another

Why do central banks have their own accounting definitions for measuring the money supply?

Because every national and regional central bank is in control of the currency which it issues

What is the role of the central bank in the economy?

To issue currency

What is the primary purpose of measuring the money supply?

To understand how money is further defined and measured

What is the main reason why items like pebbles, shells, and gold are no longer used as money?

Each country has its own form of money which is not limited only to its currency

Study Notes

Money Supply

  • The money supply is a measure of the aggregate amount of money in the economy over a particular period.
  • In the past, items like pebbles, shells, furs, whale's teeth, pieces of paper, and gold were used as money due to their widespread acceptance as a medium of exchange.
  • Today, these items are no longer used or are rarely used as money, as each country has its own form of money beyond just currency.

Money Definitions

  • Central banks use a set of definitions of money, referred to as M1, M2, M3, etc., which differ from one central bank to another but often have similarities.
  • In the Philippines, specific definitions are used to measure the money supply.
  • These definitions include deposits made in commercial banks, which affect the supply of money.

Reserve Requirement and Money Multiplier

  • The central bank can increase or decrease the supply of money by changing the reserve requirement imposed on commercial banks.
  • The money multiplier calculates the outcome of a change in a bank's reserve requirement on the overall supply of money in an economy.
  • The money multiplier is equal to the reciprocal of the reserve requirement ratio (R).
  • Lost reserves and deposits by one bank become the reserve of another bank.

Banks and Money Creation

  • Banks can create money through loans, dependent on the quantity of their excess reserves.
  • Individuals and institutions can only borrow money equal to the bank's excess reserve.

Monetary Policy

  • The government may use the money multiplier to stimulate the economy by lowering the reserve requirement, enabling banks to lend more money to others.
  • The central bank formulates its own accounting definition to measure the money supply under its control.

This quiz covers the supply of money, including deposits in commercial banks and how reserve requirements affect the money supply. It also explores how the central bank can influence the money supply by changing reserve requirements.

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