115 CFA
File: Economics - Reading 16 - 1. What is Money

1. What is Money

a. compare monetary and fiscal policy;

b. describe functions and definitions of money;

c. explain the money creation process;

What is fiscal policy?
Fiscal policy refers to the use of government expenditure, tax, and borrowing activities to achieve economic goals.

What is monetary policy?
Monetary policy refers to central bank activities to control the supply of money. Their goals are maximum employment, stable prices, and moderate long-term interest rates.

What are the three basic functions of money?
1. It serves as a medium of exchange to buy and sell goods and services
2. It is used as an accounting unit to compare the value and cost of things.
3. It provides a way of storing value to allow the movement of purchasing power from one period to another.

In regards to a bank, what are "reserves"? What is a "required reserve ratio"?
Reserves are the cash in a bank's vault and deposits at Federal Reserve Banks. Under the fractional reserve banking system, a bank is obligated to hold a minimum amount of reserves to back up its deposits. Reserves held for that purpose, which are expressed as a percentage of a bank's demand deposits, are called required reserves. Therefore, the required reserve ratio is the percentage of a bank's deposits that are required to be held as reserves.

What is the money multiplier and how is it calculated?
- The money multiplier is the amount by which a change in the monetary base is multiplied to calculate the final change in the money supply.
- Money Multiplier = 1/b, where b is the required reserve ratio. In our example, b is 0.2, so money multiplier = 1/0.2 = 5.

What is the velocity of money? How is it calculated?
- The velocity of money is the average number of times a dollar is used to purchase final goods and services during a year.
- It is computed as V = GDP/Money Supply = PY/M.

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