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Why do virtually all societies create something to function as money?
How did the combination of increased holding of excess reserves by banks and currency by the
public lead to bank failures in the 1930s?
What are the three primary reasons for the demand for money?
If nominal GDP is $200 billion and the money supply is $50 billion, what must velocity be?
Solution
1) Money serves some really important functions such as - Store of value, Medium of Exchange,
Useful for Deferred payments and it also acts as a unit of account.
2) 1930 saw that the general public increased holding of cash while the banks also retained
excess reserves at an increased rate. These were due to the fear about the stability of the banking
system. It resulted in decreased money supply as the money multiplier reduced.
3) Money is demanded for transaction motive, speculative motive and Precautionary motive.
These three constitute demand for money.
4) According to Quantity Theory of Money,
Nominal GDP = velocity of money x Money Supply
$ 200 billion = velocity of money x $50 billion
Or, Velocity of money = 4

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Why do virtually all societies create something to function as money.pdf

  • 1. Why do virtually all societies create something to function as money? How did the combination of increased holding of excess reserves by banks and currency by the public lead to bank failures in the 1930s? What are the three primary reasons for the demand for money? If nominal GDP is $200 billion and the money supply is $50 billion, what must velocity be? Solution 1) Money serves some really important functions such as - Store of value, Medium of Exchange, Useful for Deferred payments and it also acts as a unit of account. 2) 1930 saw that the general public increased holding of cash while the banks also retained excess reserves at an increased rate. These were due to the fear about the stability of the banking system. It resulted in decreased money supply as the money multiplier reduced. 3) Money is demanded for transaction motive, speculative motive and Precautionary motive. These three constitute demand for money. 4) According to Quantity Theory of Money, Nominal GDP = velocity of money x Money Supply $ 200 billion = velocity of money x $50 billion Or, Velocity of money = 4