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The Banking System

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1. An economy can be stimulated by printing more money. What are the dangers of doing that? Inflation can be decreased by reducing the money supply. What is the potential downside?

2. The only thing backing up a nation's currency is faith in the government issuing it. If this is so, what should governments do to maintain a stable currency? What actions would undermine a currency?

3. A country that has never had its own currency has formed a central bank and put you in charge of developing money. It needs to perform the necessary functions of any good currency efficiently (i.e., being a medium of exchange, a store of value, and a unit of account). Since your country is interested in trading with other members of the global economy, other nations must have faith in its fitness and the currency exchange markets must be willing to accept it.

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Solution Summary

The solutions shows that function of money in the economy, how it can be used as a tool in controlling inflation, and its acceptability by other countries. This solution is 575 words.

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The Banking System

1. Money in circulation in an economy must be backed up by actual production of either goods and or services. Printing more money and circulating it in the economy without goods and services being produced will result in a situation where there are consumers possessing enough money but are unable to find available goods and services. Entrepreneurs possessing limited goods and services will experience a surge in demand. Without any increase in the supply of goods and services, entrepreneurs will be enticed to increase their selling price. This will be inflation in the making. Printing more money will only undervalue the currency.

Therefore, printing more money is an artificial and temporary solution that will lead to more inflationary conditions.

Suppose that there is more money in circulation today due to indiscriminate printing-inflation happens. The next logical action is to decrease money supply in circulation to put a halt on inflation. This will only bring the economy ...

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