Money, including currency (cash) and checkable deposits (bank accounts that allow
checks and electronic transfers), is considered a medium of exchange. It is used to buy
goods and services, and can be easily and directly used for transactions.
Bonds, on the other hand, are xed-income securities issued by governments,
corporations, and other entities to raise capital. They represent a loan made by an
investor
b)False. In nancial market equilibrium, the money supply and money demand should be
equal, not larger. Equilibrium is achieved when the supply of money is equal to the
demand for money. In this state, the quantity of money available in the economy is
su cient to meet the needs of individuals and businesses for transactions and to hold as
a store of value.
C) True. In the money market, the relationship between the money supply and interest
rates is typically inverse. When the money supply increases, it leads to a lower equilibrium
interest rate.
When the money supply increases, there is more money available in the economy, and the cost of
borrowing money (interest rates) tends to decrease. This is because with more money circulating,
nancial institutions have more funds to lend out, and as a result, they may lower interest rates to
attract borrowers.Lower interest rates, in turn, can stimulate borrowing, investment, and consumer
spending, which can contribute to economic growth
D)True The money multiplier is how much money the banking system can create from the process
of multiplying deposits, given a certain level of reserves. The minimum reserve rate set by the
European Central Bank sets the minimum level of reserves that banks must hold relative to their
deposits.
m2013M02 = (M1 + deposits with an agreed maturity of up to 2 years) / M0
= (5,144.1 + 1,748.8) / 863.3= 3.53
m2023M02 = (M1 + deposits with an agreed maturity of up to 2 years) / M0
= (11142.5 + 1542.7) / 1539.6 ≈ 6.81
5.2
A,B)The money multiplier is an economic concept that illustrates the potential expansion of a
country's money supply as a result of commercial banks' lending activities. Demonstrates how the
initial deposit made by a customer into a bank can lead to a larger overall increase in the total
money supply of the economy.
If Ø gets bigger, the multiplier shrinks
fi
fi
ff
fi
If c get bigger the multiplier shrinks
ffi
fi
5.1
A) False. While both money (currency and checkable deposits) and bonds are nancial
instruments, they serve di erent purposes and are not used interchangeably for transactions.
C)
5.3
A,B)
C,D)
E)
5.4
a) The objective function of the optimization problem is to minimize the cost of transactions for
households. The cost of transactions includes two components: the xed cost of each
transaction, which is denoted by PC, and the opportunity cost of holding money, which is the
interest income that could have been earned if the money was invested in bonds. The
opportunity cost is represented by the product of the interest rate i and the average money
holdings per period, Md.
fi
b)