Chapter-7

Theoretical Part
1. What are the motives for holding money? Briefly explain the ‘liquidity
preference’ of John Maynard Keynes.
2. What will happen to the economy if the demand for money increases? (Explain
graphically)
3. What are the types of money? Explain?
4. Explain the statement
“The economist’s definition of money is a little different from the sense in
which the term is used in everyday language”
5. What are the criteria for any commodity to effectively perform the function of
money?
6. “Though money is printed by the central bank, the amount of money the
economy is ended up with depends on the behavior of other actors”-justify
the statement.
7. Write down the short notes on-
a) Money multiplier
b) Keynes liquidity preference theory
c) Fiat Money
8. What is the difference between M1 & M2? Why credit card can’t be counted as
money?
9. Briefly discuss the Barter System. What are the limitations in the barter system?
10.Derive the equation
𝑐+1
Money multiplier 𝑚= ( )
𝑟+𝑒+𝑐

Show the relation of r,e & c with m.

 Applied Part

1. If a bank’s deposits equal $579 million and the required reserve ratio is 9.5
percent, what dollar amount must the bank held in reserve form?

2. If the Fed creates $600 million in new reserves, what is the maximum change in
checkable deposits that can occur if the required reserve ratio is 10 percent?

3. Bank A has $1.2 million in reserves and $10 million in deposits. The required
reserve ratio is 10 percent. If bank A loses $200,000 in reserves, by what dollar
amount is it reserve deficient?
4. Assume, an economy currency ratio is 30. Currency in the market takes 10
million. The excess reserve is taken 10000 and the required reserve ratio is 0.4.
What is the money multiplier?
5. In our class, we have discussed the money supply & demand curve.
(a) What about the shape of the money supply & demand curve?
(b) Discuss the different scenarios of shift of money supply & demand curve.
6. Justify the following statements
(a) Money is the oil that lubricates the wheel of the economy by reducing transaction
costs and improving efficiency by encouraging specialization and the division of
labor.
(b) The effectiveness of money as a store of value depends on the price level in the
economy.
(c) Though money is printed by the central bank, the amount of money the economy
is ended up with depends on the behavior of other actors.
(d) The relationship of money demand with interest rate, income & inflation is
ambiguous
(e) In a developing country like Bangladesh, a large share of savers remains outside
the formal financial market.
7.
a. If M times V increases, why does P times Q have to rise?
b. What is the difference between the equation of exchange and the simple quantity
theory of money?

8.

Find out the money multiplier in the above cases