Question    3 a) What    are    the    functions    of    money? b) Draw    diagrams    illustrating    the    impact    on    the    demand    for    money,    the     supply    of money    and    the    equilibrium    interest    rate,    of    each    of    the    following.     Explain    what    is    going    on in    the    money    market    in    each    case. (i) The    central    bank    sells    securities    on    the    open    market (ii) The    economy    grows    (GDP    increases)    but    the    central    bank    moves    to keep    interest    rates    constant.

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Required Reserve and Excess Reserve Analysis

A required reserve is an amount of cash that banks must keep with themselves, which is certain percentage of the deposits made by their customers. Required reserve is a percentage of the bank's deposits that the respective bank must have on each overnight. The percentage rate is set and determined by the nation’s central bank. It is important to have such funds accumulated to meet its uncertain obligations, sudden liabilities and withdrawals. Required reserve is also known as reserve ratio. Reserve ratio is an important tool to control the money supply.