A monetary system is a scheme by which money is provided to facilitate exchanging of goods and services, and a well-functioning monetary system paves the way for effective allocation of scarce capital resources through financial markets.
(a) All currency notes and coins together represent only a small fraction of the money in a modern economy. Most of the money is in fact created in the banking system. Explain with an example how money can be created within a banking system.
(b) The renminbi will eventually crowd out the Hong Kong dollar as the preferred currency in Hong Kong as the economies of the city and Mainland China become more integrated. Do you agree with this statement? Justify your answer.