Answer to Question #205657 in Finance for Lewis Phiri

Question

QUESTION FOUR

A.Compare and contrast the Keynesian and Friedman's approach to money demand. [12 marks]

B. How would a decrease in the reserve requirement affect the (a) size of the money multiplier, (b) amount of excess reserves in the banking system, and (c) extent to which the system could expand the money supply through the creation of checkable deposits via loans? [6 marks]

C. Explain any FOUR (4) options available to the Bank of Zambia to increase the money supply? Explain how each works. [4marks]

D. Explain the THREE (3) main features of money. [3 marks]

[Total=25 marks]

Answer 1

(a) Friedman argues that demand for money depends on permanent income and incentives for holding other assets related to money while Keynesian argue that demand for money is stable and sensitive to interest rates.

They both argue that successful macroeconomic management is necessary through economic intervention by the government to ensure stability.

(b)(a) A decrease in the reserve requirement will increase the size of the money multiplier.

(b) A decrease in the reserve requirement will increase the excess reserves held by the banks.

(c) A decrease in the reserve requirement will increase the money supply.

(c) Options available to the Bank of Zambia to increase the money supply

Modifying reserve requirements: By lowering the reserve requirements, the banks can loan more money thereby increasing the money supply.

Changing rate at which it gives loans to commercial banks: This will make the loans cheaper making the commercial banks increase reserves thereby increasing the money supply.

Purchase government securities: this increases the money supply when the bank exchanges the bonds for cash to the general public.

Decreasing interest rates: This spurs investment and demand for money.

(d)Features of money

Portability. Money is portable because the currency can be can be put in pockets.

Uniformity. Money is uniform value.

Limited supply. Money supply is regulated to retain its value over time.