Commodity monies have intrinsic value, meaning they have an alternative use apart from
serving as money. Gold is a commodity money since it has many other uses, such as jewelry or
dental fillings. Fiat money is money that is intrinsically worthless. The actual value of fiat
money comes from the government that backs that money, meaning they ensure that it is
accepted. Legal tender is the paper money that a government provides. The government
declares that it's money must be accepted in settlements of debt.
To make a legal tender into a money, governments will often times require that the legal tender
be used in order to pay taxes. They also promise the public that they will debase the currency,
meaning not print money so fast that it looses it's value. A money's value decreases when it's
supply is rapidly increased, so governments control the supply of the legal tender.
a. M1 stays the same, M2 decreases by $500,000.
b. M1 decreases by $10,000, M2 stays the same.
c. M1 increases by $5000, M2 stays the same.
a. Excess reserves are $30,000
b. The bank can make up to $150,000 in loans since they currently have $50,000 loaned out,
$50,000 in reserve and their total deposits can only equal $250,000.
c. Money multiplier is 5
Yes, thank bank could make a loan in the amount of $90,000 as long as the loan stays in the
bank. A 20% required reserve ratio means the bank has excess reserves of $80,000. Since the
money multiplier is 5, they can make loans of up to $400,000, assuming the loans stay in the