What factors determine the amount of purchasing power........

Kamaldihnio

What factors determine the amount of purchasing power that it is possible for banks to create?

That sentence makes no sense.

Are you talking about the fractional reserve system?

Kamaldihnio

Thats a question in a past exam paper.

First question is

a) Explain the functions of money (10 marks)

b) What factors determine the amount of purchasing power that it is possible for banks to create? (15 marks)

Économiste Monétaire

Purchasing power is being used, incorrectly, as an interchangeable term for 'money', I'm guessing. The amount of money commercial banks can 'create' is dependent upon the demand for borrowings, minimum reserve ratios, observable trends in demand deposit withdrawals, the demand for real money balances, capital and money market structures, issues vis-à-vis the domestic currency, the regulatory environment, risk preference of banks, et cetera.

I'm amazed that someone would have the audacity to create four threads looking for others to do their exam prep.

Kamaldihnio

Bit Harsh, I read this forum quite a bit since I started studyin Economics but never actually post and was just lookin for some help. I was looking for my answers in plain English so I could get my head around it. Obviously I planned on readin books on the areas also but plain English can give a person a good start.

Thank you for your explanation all the same!

Économiste Monétaire

That's not meant to be harsh, that's just how I interpreted the motive behind your threads; i.e. someone close to an exam and not bothered reading the book. Asking someone for an exposition on national income, exchange rates, and AD-AS is slightly taking the proverbial, in my opinion.

Kamaldihnio

Look dood I dont want to argue, I know you post here a bit and know your stuff, I was just asking for a general explantion of these areas, maybe I was a bit out of order, if I was I applogise.

Anyway while I have you here and we are now friends.

In Classical Unemployment or Real Wage unemployment, what are they talking about when they say that 'wages will be sticky downwards', what does that mean please?

I am just tryin to learn, thats all.

Économiste Monétaire

Sticky means that markets don't clear immediately, wages and prices move at a slow, rigid pace. An example would be peoples' aversion to taking wage cuts, like public sector employees in Ireland, or firms with menu costs. Wages are only as useful as the goods and services they allow you to buy. Say prices begin to fall (disinflation) then your real wage goes up (nominal wage over the price level), firms take the hit with reduced revenue (P.q) and unless there are wage reductions to restore the previous real wage level, the firm will make a loss. If wage reductions won't happen, people are going to get fired. Hence, employees unwilling to adjust wages down creates unemployment.

Kamaldihnio

Économiste Monétaire wrote: »

Sticky means that markets don't clear immediately, wages and prices move at a slow, rigid pace. An example would be people's aversion to taking wage cuts, like public sector employees in Ireland, or firms with menu costs. Wages are only as valuable as the goods and services they allow you to buy. Say prices begin to fall (disinflation) then your real wage goes up (nominal wage over the price level), firms take the hit with reduced revenue (P.q) and unless there are wage reductions to restore the previous real wage level, the firm will make a loss. If wage reductions won't happen, people are going to get fired. Hence, employees unwilling to adjust wages down creates unemployment.

Like now.

Thats a sweet explanation. Thank you.

What course are you doing?

Kamaldihnio

Business Information Systems more than likely but that could change as my first year subjects are core subjects for alot of other stuff, I have to do economics, Lecturer knows his stuff but his notes are pants plus he thinks we are all naturally gifted at economics or something. Micro, what I have done of it, is fine, Macro is a bit tougher but I just need to understand it and Il be ok. Have to admit, I enjoy the subject. Good time to be learning it I suppose. Tough though.