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Tutorial 2 bnk501

This document contains tutorial solutions for a banking fundamentals course. It discusses whether money is good or bad, depending on how it is used. It also summarizes the money creation process where banks lend out excess deposits, expanding the money supply. It explains that the central bank determines the money supply and can expand it by buying assets from the public, increasing the monetary base. It shows graphically how purchasing bonds from the central bank expands the money supply. Finally, it discusses the relationship between inflation, unemployment, and monetary policy.

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Veronica Mishra
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42 views

Tutorial 2 bnk501

This document contains tutorial solutions for a banking fundamentals course. It discusses whether money is good or bad, depending on how it is used. It also summarizes the money creation process where banks lend out excess deposits, expanding the money supply. It explains that the central bank determines the money supply and can expand it by buying assets from the public, increasing the monetary base. It shows graphically how purchasing bonds from the central bank expands the money supply. Finally, it discusses the relationship between inflation, unemployment, and monetary policy.

Uploaded by

Veronica Mishra
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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BNK 501: FUNDAMENTALS OF BANKING

SEMESTER 1 2021
TUTORIAL 2 SUGGESTED SOLUTIONS
1. Most people don’t spend much time wondering what money is. With example discuss
whether money is good or bad.
 To answer this question it simply depends how you use money. It is bad if
 You use it to buy guns and kill people or harm people,
 If you gain by doing bad things (selling drugs paying worker really low wages to work),
 If you win lottery and can’t control the happiness.

 To answer this question it simply depends how you use money. It is good if
 Having a decent job doing a good deed with it afterwards,
 It makes the world go round and round,
 Give some money to those who do not have money and in a couple of days you'll feel
good as to what others did when you did not had enough money.
2. Explain the money creation process.
Banks accepts deposits and lends out the excess reserves. The loans are spent on buying
goods and services and hence they end up as deposits in other banks. Other banks turn
those deposits out as loans keeping required reserves. The cycle continues unless and
until excess reserves becomes zero.
3. Who determines the nation’s money supply? Explain how the money supply could be
expanded or reduced in an economy in which all money is in the form of currency.
The size of the nation’s money supply is determined by its central bank; in the United
States, the central bank is the Federal Reserve System. If all money is in form of
currency, the money supply can be expanded if the central bank takes newly minted
currency and uses it to buy financial assets from the public or directly form the
government itself. To reduce the money supply, the central bank can sell financial assets
to the public or the government, taking currency out of circulation.
4. What is the effect on the monetary base of an open-market purchase of Fijian Treasury
securities? What is the effect on the money supply?
An open-market purchase increases the monetary base. The increase in the monetary
base leads to an increase in the money supply through the multiple expansions of loans
and deposits.
5. On a money market graph show the effect if public purchases bond from RBF.

Int. Rates MS 2 MS 1

6. Assume that the quantity theory of money holds and Quantity


that velocity is constant at 5. Output
is fixed at its full-employment value of 10,000, and the price level is 2. Determine Money
Supply.
MV =PQ
M 5=2∗10000
5 M =20000
20000
M=
5
M =4000
7. Discus the illustration

 Inflation reduces the purchasing power of each unit of


currency, which leads to increases in the prices of goods
and services over time. It's means you have to spend more
to fuel up, buy groceries, or get a haircut. In other words, it
increases your cost of living.
 Every central government wants to control the level of
inflation and they try to implement policies (OMO)
 Historically, inflation and unemployment have maintained
an inverse relationship. Low levels of unemployment
correspond with higher inflation, while high unemployment
corresponds with lower inflation and even deflation. When
unemployment is low, more consumers have discretionary
income to purchase goods. Demand for goods rises, and
when demand rises, prices follow. During periods of high
unemployment, customers purchase fewer goods, which
puts downward pressure on prices and reduces inflation.
 Any other relevant view of the students pertaining to this
area should be equally considered.

THE END

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