Learning objectives
Define money, explain its functions and characteristics, and distinguish narrow from broad measures of the money supply
Describe the functions of commercial banks and the balance they strike between liquidity, security and profitability, including reserve and capital ratios
Explain credit creation and calculate the bank credit multiplier (1 ÷ reserve ratio), and analyse other causes of changes in the money supply: the central bank, government deficit financing, quantitative easing and the balance of payments
Use the quantity theory of money (MV = PT) to link money and inflation, and evaluate policies to reduce inflation
Explain the demand for money through liquidity preference (transactions, precautionary and speculative motives) and interest-rate determination by loanable funds and Keynesian theories
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