Money, Banking, The Financial System And How Banks Create Money

Front 1

What is money?

Back 1

A form of asset that is used as a medium of exchange, as a unit of account and a store of value.

Front 2

M3 is comprised of

Back 2

Currency (coins and notes), current deposits (cheque accounts) and non-current deposits (savings).

Front 3

Currency is a form of token money which is

Back 3

Money for which the intrinsic value of the commodity used to hold the monetary unit is less than the recorded value of the money

Front 4

Broad money refers to

Back 4

M3 plus the borrowings from non bank financials less the currency and bank holdings of these firms

Front 5

Credit cards are

Back 5

Not money, and are just a simple method of obtaining short term loans

Front 6

M0, the monetary base, is composed of

Back 6

Currency in public and banks plus the banks demand deposits with the RBA

Front 7

The two components of the demand for money are

Back 7

The transactions demand and the assets demand for money

Front 8

The transactions demand for money is

Back 8

THe demand for money as a medium of exchange, and depends on money GDP. Is vertical

Front 9

The assets demand for money is

Back 9

The demand for money as a financial asset and store of wealth, which depends on interest rates and is downward sloping

Front 10

The asset demand for money is downward sloping

Back 10

due to the opportunity cost of forgone interest payments when holding wealth as cash when interest rates are high as opposed to interest bearing assets

Front 11

The total money demand is therefore

Back 11

Downward sloping and shifted to the right by the transactions demand. Money GDP changes shift this curve

Front 12

The RBA is

Back 12

The banker to the banks that controls note issue, government banking and the employment of monetary policy

Front 13

Banks have a reserve ratio which is

Back 13

the reserves that banks are required to maintain divided by the banks deposit liabilities

Front 14

Any more held cash are known as

Back 14

excess reserves

Front 15

Banks may loan out these excess reserves which results in

Back 15

the creation of money when deposits are created for the borrower in exchange for the IOU (loan) to the bank

Front 16

In a multibank system

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This created money may then be desposited and loaned out repeatedly, creating more and more money

Front 17

In general the amount of money created is given by

Back 17

The monetary multiplier m = 1/reserve ratio

Front 18

If reserves are withdrawn

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The reverse effect can also take place by a factor of the money multiplier

Front 19

Possible leakages of the money roll-on include

Back 19

Currency drains (cash payments remaining in circulation), transfer to NBFI's or larger excess reserves

Front 20

Borrowing is likely to be low during

Back 20

recession, which causes the full multiplier effect to not take plcae

Front 21

Banks may affect recession or inflation by

Back 21

holding back or increasing credit creation and thus affecting the economy