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

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Econ103 – Macroeconomic Principles - Fall 2010 – Prof. Werner Baer reading 6 p.1 What are the necessary characteristics for something to be used as money? s readily acceptable (including physical durability and stability of the supply) s portable s divisible s non-counterfeitable (all units must be identical and impossible to be imitated) What are the uses (functions) of money? s medium of exchange (mean of payment) s store of wealth s 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) … By how much will deposits in the bank system potentially increase due to the initial
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This note was uploaded on 03/10/2011 for the course ECON 103 taught by Professor Staff during the Spring '08 term at University of Illinois, Urbana Champaign.

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

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