CHAPTER 49
Money, Banking, and Credit
LEARNING OBJECTIVES
List and explain the three functions of money.
OUTLINE OF CHAPTER
I. Money and the Functions of Money
II. A History of Money
KEY TERMS
assets
those things owned by the bank or owed to the bank
legal tender
the paper that must be accepted as payment for all debts
liabilities
ANSWERS TO END OF CHAPTER REVIEW QUESTIONS
List and explain the three functions of money.
1.
2. Explain why an index card or a cow does not fulfill all three functions of money.
3.
next? Explain.
First stage in the history of money is the use a commodity to serve as money. The second
4. What was the role of the earliest bankers? Why? How did bankers eventually begin to
The earliest bankers held precious metals in safekeeping and issued deposit receipts.
Discuss how credit and interest rates are related to business cycles.
5. Why do interest rates rise in expansions and fall in contractions?
The cost of borrowing money rises and falls with the business cycle, though with a time
6. Why do interest rates lag at the peak, still rising for a little while (or at least holding
steady), while a recession has already started?
At the peak, the interest rate remains high or falls slightly. At the beginning of a
7. Why have many households fallen deeper into debt over the last thirty years?
APPENDIX 49.1
How Banks Create Money
LEARNING OBJECTIVES FOR APPENDIX 49.1
Explain why there are reserve requirements on deposits.
OUTLINE OF APPENDIX
I. Making Money
II. Summary
KEY TERMS IN APPENDIX 49.1
excess reserves
ANSWERS TO APPENDIX 49.1 REVIEW QUESTIONS
Explain why there are reserve requirements on deposits.
1.
this cause problems for the banking system and the economy?
2. Why are bank panics so destructive? What was the response of the government after the
Great Depression to try and stop panics?
In panics, not all depositors can get their money. In some panics of the 19th century,
Explain why an initial deposit in the banking system leads to the creation of new deposits.
3. Why does a bank make loans?
4. money?
Banks earn money on loans. They do not earn money on reserves. Therefore, one could
Calculate the change in deposits or money supply from an initial deposit
5. How do changes in the reserve requirement affect the deposit multiplier?
6. Given an initial deposit of $100, how much money is created if the reserve requirement
is 5%, 10%, 15%?
RR = 5%, Multiplier = 1/.05 = 20, money created = $2,000
State and explain the meaning of the assumptions made when using the money multiplier
and what happe
7. What happens to the money creation process if banks do not lend out all their excess
reserves?
Money created will be less than implied by the money multiplier.
8. What happens to the money creation process if people do not redeposit all money into
the bank?