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Econ Reading 6 - Econ103 Macroeconomic Principles Fall 2010...

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Econ103 – Macroeconomic Principles - Fall 2010 – Prof. Werner Baer reading 6 p.1 Reading 6 – Money, Banking System and Monetary Policy – Q&A What are the necessary characteristics for something to be used as money? square4 readily acceptable (including physical durability and stability of the supply) square4 portable square4 divisible square4 non-counterfeitable (all units must be identical and impossible to be imitated) What are the uses (functions) of money? square4 medium of exchange (mean of payment) square4 store of wealth square4 unit of account (measure of value) What is the simplest “definition” of money? Or, what are the simplest forms of money nowadays? M1 = Currency+ travelers’ checks + demand deposits +other checkable deposits. Describe the steps of the money creation process starting with a deposit of $1000 in a bank. Assume RRR required reserve ratio = 0.10 (10%). 1) Initial deposit of $1000; 2) the bank keeps 10% in reserves and loans the rest ($900) to somebody; 3) the person who borrowed the money deposits it ($900) in some bank; 4) the bank keeps 10% in reserves and loans the rest ($810) to somebody 5) the person who borrowed the money deposits it ($810) in some bank; 6) …
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