1. Please explain why there is a critical need within the economy and financial system to have money market instruments available to anyone who can afford them? 2. Why are deposit-type intermediaries able to create money? What factors increase the amount of deposits the banking system can create with any given injection of new reserves? Solution Money market is the market where corporations, financial institutions and governments buy and sell short term securitites. The duration of these securities can be between 24hours to 365 days. They key function of money market is to provide liquidity to these short term money market instruments. Some of these instrucments include T-Bills, Commerical paper, Federal funds, Certificate of Deposite, Eurodollars etc. The demand and supply participants for short term funds includes corporations, financial institutions and governments. The need for a well functioning money market arises so that these participants can access these market to buy cheap loans of shorter duration. There could arise a situation where timings of the inflows and outflows of cash are not very well synchronized. Money markets hence provide solution to this cash timing problem at a relatively low cost..

1. 1. Please explain why there is a critical need within the economy and financial system to have
money market instruments available to anyone who can afford them?
2. Why are deposit-type intermediaries able to create money? What factors increase the amount
of deposits the banking system can create with any given injection of new reserves?
Solution
Money market is the market where corporations, financial institutions and governments buy and
sell short term securitites. The duration of these securities can be between 24hours to 365 days.
They key function of money market is to provide liquidity to these short term money market
instruments. Some of these instrucments include T-Bills, Commerical paper, Federal funds,
Certificate of Deposite, Eurodollars etc.
The demand and supply participants for short term funds includes corporations, financial
institutions and governments. The need for a well functioning money market arises so that these
participants can access these market to buy cheap loans of shorter duration. There could arise a
situation where timings of the inflows and outflows of cash are not very well synchronized.
Money markets hence provide solution to this cash timing problem at a relatively low cost.