Answer to Question #169089 in Finance for Bishem

Question #169089

Identify the following with a sentence or at most two and give an example in each case:

              i.        Money Multiplier

             ii.        Monetary aggregate

            iii.        Money illusion

           IV.        Dollarization

V. Devaluation

Expert's answer

Monetary Multiplier

Money multiplier is a closely related ratios of commercial bank money to central bank money under a fractional-reserve banking system.

If the commercial banks gain deposits of £2 million and this leads to a final money supply of £20 million. The money multiplier is 20

Monetary Aggregate

Monetary aggregate is a formal way of accounting for money, such as cash or money market funds.

If a central bank increases the discount rate, the cost of borrowing for the banks increases.

Money Illusion

Money illusion is the belief that money has a fixed value and the effects of inflation are ignored.

An individual will usually see a 2% cut to nominal wages as unfair or they lose 2% of their purchasing power.


Dollarization is a type of currency substitution where the U.S. dollar is used in addition to or instead of the domestic currency of another country.

Panama is fully dollarized.


Devaluation is the intentional lowering of the value of a country's money relative to another currency,currency standard or group of currencies.

Panama pegs its currency (Balboa) to the US Dollar.

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