University Economics Assignment: Banks, Money, and Credit Market

This economics assignment delves into the core concepts of money, banking, and the credit market. It begins by defining the functions of money and contrasting it with barter systems, then proceeds to explain how banks create money through lending and borrowing. The assignment analyzes bank balance sheets, highlighting the nature of deposits as liabilities and loans as assets, and illustrates the process of money creation. It further explores the functions and risks faced by banks, including maturity transformation and liquidity risks. The role of central banks, money markets, and policy interest rates are also examined, with a focus on how central banks support commercial banks and manage the flow of funds in the economy. Finally, the assignment touches upon credit rationing and its implications. The solution provides detailed answers to questions about the role of central banks, the money market, and credit rationing, offering a comprehensive understanding of these crucial economic principles.

Name
Student Number
Lecture Day/Time
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Part - A
(a) Rice is not a form of money in Australia because money has three main functions that is
money act as a medium, a standard and storage. As per the defined functions, it can be said
that rice does not contain the aforesaid properties and hence, does not constitute money. Rice
cannot act as a medium at all places like money. Secondly, it cannot be measures in terms of
money everywhere. Lastly, it cannot be stored for an indefinite period of time.
(b) The offer provided by the employer is not lucrative because providing equivalent rice will not
serve the main purpose. Employees provide service that is measured in terms of money and
instead money rice cannot be provided. This means the services provided is valued in terms
of money that is entirely wrong.
The main disadvantages that the barter system comprises are that the standard is absent and
hence, anything can be exchanged for another thing. Hence, one party becomes the gainer
while other looser.
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Answer – B
Answer (a)
New Jersey Bank Balance Sheet
Assets Liabilities
Transaction deposit
$10m
When Carmella deposits $10 million in the bank it will appear under the heads liabilities.
The bank is accepting the deposit from Carmella and is payable on demand hence, banks will
treat this as liability in its balance sheet because the money belongs to the customer.
Answer (b)
New Jersey Bank Balance Sheet
Assets Liabilities
Loans
Consumer Loans $10m
Total
In this scenario, the bank is provided a loan of $10 million to Carmella that means the bank is
providing a specific sum as a loan. It is the money of the bank and hence will appear under
the Asset side while will be a liability for the customer.
Answer (c)
Banks creates money through the process of borrowing and lending. Money is created when
the lending takes place by banks. In this scenario, the bank has accepted deposit, as well as
lend a sum of $10 million signifying that there is great scope of money creation and the ambit
is broad in this scenario.
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Bank deposits are termed as Liability from the point of view of a bank as it is payable to the
respective customers who have deposited their amounts in the bank and can withdrawal may
be made by them any time and bank has to pay on demand . So clearly it is liability of the
bank.
Answer (d) Bank has created $10 million from the borrowing and lending.
Answer (e)
New Jersey Bank Balance Sheet
Assets Liabilities
Consumer loan $10m
Total
Foreshore Bank Balance Sheet
Assets Liabilities
Borrowings $10million
Answer (f)
No, New Jersey bank and Carmella will not have any problem after the transfer is done to
Vito because Carmella is purchasing a property and needs to pay him. The payment is done
by way of bank transfer which is hassle free and for a big sum like $10 million it is the best
option.
Answer (g)
No, the New Jersey bank will not have any problem irrespective of the number of customers
because the intra transfer among banks is a common parlance. This way the money keeps
revolving and helps in the flow. Further, this function helps in creating a better atmosphere
where the large payment problem is eliminated.
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Part C
1. The retail sector banks provide sources of finance like market loans, short term borrowings,
and mortgages. The practice of the banks to borrow money on short time frames and lending
them out is termed as maturity transformation. The bank charges a small amount of money as
interest for providing the loans or finance to the individuals. For example, it can be observed
that the bank is selling equity shares to the public and people are investing in the organization
by buying the shares. Further, the funds collected with the help of equity shares are being lent
to the public as loans but at higher interest rates.
2. Sometimes, it is observed that the process backfires because all the investors withdraw
money at the same time. This restricts the bank from lending money and earning interest on
it. Therefore, it is very important for the organization to ascertain all the risks that are present
in the environment before carrying out the process of maturity transformation. If the investors
are not interested in the organization then and the bank will face severe problems while
conducting the business.
3. No, the bank will not face any kind of liquidity risk because the money collected by it will be
lent out to the general public. The money that is collected by the organization by selling the
equity shares will be used by it to give loans to the public and earn interest on it. Therefore,
the organization will not have an increased position of cash in hand or liquefiable asset.
Hence, it can be stated that the organization is not facing any kind of liquidity risk.
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Part : D
a. Central banks helps the commercial banks by lending out sum as the central bank is the
lender of the last resort. Hence, commercial bank New Jersey can borrow from Central Bank
and give loan to the customer.
b. The central bank lends money to commercial banks at the discount rate or the interest rate.
Hence, the rate needs to be paid by New Jersey bank
c. The money market helps in keeping a steady flow of funds in the economy. Further, it aids in
the fuller development of the economy by ensuring that the funds are available in the
economy.
In this case, the bank only has base money and loan that equals to $331 billion while the
banks has claim of $331 billion. In this scenario, it is difficult for the bank to pay the money.
The customer will not be able to claim all their at once because the bank is running short of
funds. The balance sheet of the bank is very weak and risky.
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Part E
Answer – 1
Borrowing money to build golf is a heavy investment and such amount can be provided
depending upon the credit worthiness of the debtor. IT is due to the fact that the interest rate
stands higher and there is a high stake in terms of personal finance.
Answer – 2
The cap on interest rates will not harm the poor rather help them in obtaining loan and
payment can be made easily. When the interest rate is capped then the poor will not be
subjected to higher rate of interest and this will help their cause of repayment and not being
overburdened.
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