Question 5

a) What is fiat money? What is commodity money? Which kind do we use?

b) Explain whether each of the following events increases or decreases the money supply.

i. The State Bank of Pakistan sells bonds in open-market operations.

ii. The State Bank of Pakistan increases the reserve requirement.

iii. The State Bank of Pakistan reduces the interest rate it pays on reserves.

iv. MCB Bank repays a loan it had previously taken from the State Bank of Pakistan.

v. After a rash of pickpocketing, people decide to hold less currency.

vi. Fearful of bank runs, bankers decide to hold more excess reserves.