1. The fractional banking system used in New Zealand is key to the process of creating money used by the Reserve Bank of New Zealand (RBNZ). This involves a number known as the Reserve Ratio (RR), which is the fraction of deposits commercial banks keep in reserve with the Reserve Bank. The money multiplier is also important to this process, as it represents the 'flow on' effects of money entering the economy that is not kept in reserve.

a) Let us assume that the RR for commercial banks is 25%. Now, the RBNZ injects $2 million worth of money into the monetary base through the commercial banks. How much of this initial injection of money is kept in reserve? How much is lent out to the rest of the economy?

b) What is the value of the money multiplier associated with this RR?

c) Using the money multiplier, work out the total money increase of the $2 million injection.

d) What are the three functions of money? Please describe each function briefly.