Chapter 9 – The Monetary System

Question 1
Which of the following are money in the Malaysian economy? Which are not? Explain
your answer by discussing each of the three functions of money.
Money serves three function:
i. A medium of exchange: provides the item used to make transactions.
ii. A unit of account: provides the way in which prices and other economic value
are recorded
iii. A store of value: provides a way of transferring purchasing power from the
present to the future.

a. a Malaysian Ringgit
ANSWERS:
Malaysia Ringgit is used as money in the country Malaysia’s economy, as it
serves as a medium of exchange for goods and services. Second, it serves as a
unit of account for which money could measure the value of goods and services
and prices in stores are listed in terms of RM. Third, it serves as a store of value
for everyone who holds it over time and future transaction are possible with the
help of money.

b. A Mexican peso
ANSWERS:
Mexican peso is not used as money in the country Malaysia’s economy. Firstly, it
is not used as a medium of exchange. Second, it is not served as unit of account,
price is not given in terms of Peso. Third, it could serve as a store of value.

c. a Picasso painting
ANSWERS:
Picasso painting is not used as money in the country Malaysia’s economy,
because it’s not used as medium of exchange for purchasing goods and services.
Second, it is not served as unit of account where price is not given in terms of
Picasso. However, it serves as a store of value.
d. a plastic credit card
ANSWERS:
Plastic credit card is not used as money in the economy of Malaysia. It is similar
to money but represents deferred payment rather than immediate payment.
Thus, credit card not really or do not fully fulfilled the medium of exchange
function of money, nor its a store of value. It is an instrument of short-term
borrowing rather than being an asset like currency.

Question 6
You take RM 100 you kept under your pillow and deposit it in your bank account. If
this RM 100 stays in the banking system as reserves and if the bank hold reserves
equal to 10 percent of deposits, by how much does the total amount of deposits in
the banking system increase? By how much does the money supply increase?
ANSWERS:
First we need to identify the money multiplier by using the following formula:

Money Multiplier = 1/Required Reserved Ratio

= 1/0.10
= 10
Use the money multiplier to find out the total deposit
Total Deposits = Cash Deposit x Money Multiplier
= RM 100 X 10
= RM 1000
This means that the deposit will increase by RM1,000.
Money supply increase can be obtained by taking the deposit and subtracting it
with the currency because the currency is hold by the public:
Money Supply Increase = RM 1,000 - RM 100
= RM 900
The money supply increase by RM 900.
Q11. The economy of Elmendyn contains 2,000 RM1 bills.

a) If people hold all money as currency, what is the quantity of

money?
Answer:
If people hold all money as currency, the quantity of money would be
RM2,000.

b) If people hold all money as current account deposits and banks

maintain 100 percent reserves, what is the quantity of money?
Answer:
If people hold all money as current account deposits and banks maintain 100
percent reserves, the quantity of money is RM2,000. In this case, banks
maintain 100 percent reserves, which means the bank will keep the money
deposited and will not make any further loans to public. Thus, the quantity of
money is RM2,000.

c) If people hold equal amounts of currency and current account

deposits and banks maintain 100 percent reserves, what is the
quantity of money?
Answer:
If people hold equal amounts of currency and current account deposits and
banks maintain 100 percent reserves, the quantity of money is RM2,000. In
this case, people hold currency of RM1,000 and the current deposit is also
RM1,000 and banks maintain 100 percent reserves. Thus, the quantity of
money is RM2,000 (RM1,000+RM1,000= RM2,000).

d) If people hold all money as current account deposits and bank

maintain a service ratio of 10%, what is the quantity of the money.
Answer:
If banks have a reserve ratio of 10%, the money multiplier is 1 / 0.10 = 10.
So, if people hold all money as demand deposits, the quantity of money is 10 x
RM2000 = RM20,000.
 e) If people hold equal amounts of currency and the current account
deposits and banks maintain a reserve ratio of 10%, what is the quantity
of the money?
Answer:
If people have the equal amounts of currency (C) and current deposits (D) and
the money multiplier for reserves is 10, then two equations must be satisfied:
(1) C=D. This means people have equal amounts of currency and current
deposits; and
(2) 10 x (RM2000 –C) =D
so that the money multiplier (10) times the number of dollar notes that aren’t
being held by people (RM2000 – C) = current deposits (D).
Putting the first equation in the second gives;

D = 10 x (RM2000 –D)
RM 20,000
D=
11
= RM1818.18

Because of the equation of C=D is true. Therefore;

C= RM1818.18.

quantity of money = Currency(C) + Deposit(D)

= RM1818.18 + RM 1818.18
= RM3636.36

References:
Mankiw, N. G., Goh, s., K., Yen, s., H., Mustafa, M. M., & Ong, h., B. (2011). CHAPTER 16 THE
MONETARY SYSTEM. In Mankiw, N. G., Goh, s., K., Yen, s., H., Mustafa, M. M., & Ong, h., B.,
PRINCIPLE OF MICROECONOMICS MALAYSIA EDITION (pp. 317-336). Malaysia.: Cengage
Learning Asia Pte Ltd.