Money/Bank Questions?

1. Explain the relationship between debasing coins and money supply?

2. Name 2 ways the governement regulates financial institutions.

3. Explain how the increased use of credit and debit card will lead to a cashless society.

4. Explain: With the rise of automated banking machines and electronic banking in the future, people will bank from their homes.

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  • 1 decade ago
    Best Answer

    1. Explain the relationship between debasing coins and money supply?

    Debasing coins generally means removing them from circulation. In the United States, the recent debate has been whether to remove pennies from circulation. This would save the government money because pennies are expensive to mint. Debasing pennies would have no impact on the money supply because the government would replace every 5 pennies debased with a new nickel. Also, pennies are a tiny fraction of the money supply. All coins are a tiny fraction of the money supply. Most "money" is checking accounts and savings accounts (plus Certificates of Deposits and other time deposits) at banks and other financial institutions. Paper currency is only a fraction of the total of bank deposits. Coins are a much smaller fraction than paper currency.

    2. Name 2 ways the governement regulates financial institutions.

    The government "regulates" financial institutions in many ways, but the intent of the question seems to relate to the money supply. The government (Board of Governors of the Federal Reserve System, which is the US central bank) does two things in this regard:

    a. Reserve requirements. Banks are required to maintain a certain percentage of their checking accounts (above a threshold level that is reserve-free) in a deposit with a regional Reserve Bank or with another bank. This ensures liquidity, which means that the bank can meet needs of depositors for withdrawals, even if the demand increases unexpectedly. It also prevents the bank from loaning out this money, which restricts the total money supply.

    b. Federal funds interest rate. The Reserve Bank will also lend money out to banks on an overnight basis to allow them to clear checks and otherwise make settlement on their immediate obligations each night. They charge the banks interest on these overnight loans at the "fed funds" rate. When the Federal Reserve raises the "federal funds" rate, it makes the "cost"of the banks' "funds" increase, and they generally raise the interest rates they charge businesses and consumers for loans to make up for their increased cost of funds.

    Both of these practices affect the total supply of money in the economy indirectly. The Federal Reserve also directly affects the money supply by buying and selling government securities (e.g., T-bills) on the open market.

    3. Explain how the increased use of credit and debit card will lead to a cashless society.

    As people increase their use of credit cards and debit cards, they need to carry less cash, just as the use of personal checking accounts has reduced the need to carry cash. If less cash is needed, the government will print less paper currency and mint fewer coins. Also, cash is expensive to handle. A business needs to hire someone to count the money in the cash registers, watch the sales people and count drawers periodically to make sure they are not stealing, train sales people not to be fooled into being "short-changed" by customers, hire an armored car service to pick up cash each day and bring new cash and change to make change for customers the following day, etc. Banks have to spend money to handle the paper currency and coins too. Debit cards and credit cards, while they have some expense in handling, are much cheaper and more reliable. The machines can automatically count the receipts and they are transmitted via phone lines to the bank instantaneously. Since these payment forms are cheaper, there will be an incentive to use them instead of paper currency and coins, and eventually, the use of paper and coin will diminish and, perhaps, be discontinued.

    4. Explain: With the rise of automated banking machines and electronic banking in the future, people will bank from their homes.

    In the "old days," a person had to take his/her paycheck to the bank and "cash" it. He/she would then take the cash around to the landlord and pay the rent, to the phone company and pay the phone bill, to the electric company and pay the electric bill, to the grocery store and pay the grocer (if the grocer let him/her buy groceries "on account"), etc. Then people got personal checking accounts and could take their paycheck to the bank, deposit it, take out a little cash, and write checks to pay all those bills by mail. Today, people can have their paychecks deposited automatically, then go to the ATM to get a little cash from time to time, and they can pay their bills with their laptop computer while they sit and watch television. They don't have to make a special trip to the bank, and they don't have to put stamps on their bills to mail them. It is much more convenient and much cheaper to bank from home by internet. Customers can also often do many banking transactions using a telephone and punching keys to access different banking menus.

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  • 1 decade ago

    HOMEWORK>>>>>>>..........

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