Question

1. List and describe the three functions of money.

2. You take $100 you had kept under your mattress and deposit it in your bank account. If this $100 stays in the banking system as reserves and if banks hold reserves equal to 10 percent of deposits, by how much does the total amount of deposits in the banking system increase? By how much does the money supply increase?

Answer 1

List and describe the three functions of money:

1. Money as a medium of exchange: This function of money implies that money is accepted by everyone as a medium for exchange of goods and services or all the transaction in the economy.
2. Money as a unit of value: This function implies that money is used as a medium to measure value of goods and services like we calculate weight in Kg, we use money to value goods and services.
3. Money as a store of Value: This function implies that money can be saved for future use that is a person can keep money and use it in future transactions whenever required.

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2.

Money supply= Deposit + Currency and cash with public

Here Currency and cash with public is 0, so

Deposit = Money supply, it implies that:

Change in deposit = Change in money supply

Initial deposit = $100

Required reserve ratio= 10%

Change in total deposit = Change in money supply = Initial deposit x (1/Required reserve)

Change in total deposit = Change in money supply= $100 x (1/10%)

Change in total deposit = Change in money supply= $100 x (100/10)

Change in total deposit = Change in money supply= $100 x 10= $1000

The total amount of deposits in the banking system increase by $1000

The money supply increase by $1000