ECON30005 · Money and Banking
The Complete Exam Bible · S1 2027Money and Banking
ECON30005 Money and Banking is the University of Melbourne's third-year, intermediate subject in the Department of Economics that sits at the intersection of macroeconomics and finance. It follows one through-line — how the financial system channels savings into intermediation, credit and money creation, liquidity provision, and ultimately investment, inflation and output — across four blocks. Weeks 1-3 build the theory of money: its three functions and evolution, the measurement of monetary aggregates (US M1/M2 and the RBA's currency/M1/M3/broad money), the quantity theory MV=PY and Keynesian money demand, and the overlapping-generations (OLG) model that delivers long-run money neutrality alongside short-run non-neutrality and the economics of inflation and hyperinflation. Weeks 4-6 turn to banking and intermediation: why asymmetric information (adverse selection and moral hazard) makes intermediaries necessary, how banks create money by lending, the money multiplier 1/(required reserve ratio), banking risk and Basel-style regulation, the costly-state-verification model of the optimal debt contract, and the Diamond-Dybvig model of liquidity insurance and self-fulfilling bank runs. Weeks 7-8 cover central banking and monetary policy: the toolkit (open-market operations, interest on reserves, the policy rate), the Taylor rule, the monetary transmission mechanism, the New Keynesian model, inflation targeting and time-inconsistency. Weeks 9-11 close with financial crises and the international system: the global financial crisis and securitisation, exchange rates and the policy trilemma, and emerging-market twin crises. This subject is decided by its final exam. Continuous assessment — tutorial participation (10%), weekly pre-tutorial Canvas quizzes (10%) and two group assignments (10% each) — carries 40%, and a 2-hour closed-book end-of-semester examination worth 60% carries a hurdle: you must score at least 50% on the final exam itself to pass the subject, however well you did on the coursework. The exam runs three sections (true/false, short essays and a worked model) and a Casio FX82 calculator is permitted. Confirm the current assessment structure, weights and exam timing on Canvas and the UniMelb Subject Guide; your ECON30005 result feeds the Weighted Average Mark (WAM) that later economics subjects build on.
What ECON30005 covers
The subject runs across a 12-week semester in teaching order, from what money is and how it is measured through to central banking, the GFC and the international monetary system. Continuous assessment — weekly Canvas quizzes, tutorial participation and two group assignments — carries 40%, while a 2-hour closed-book examination in the examination period carries 60% and must be passed on its own (a 50% hurdle) to pass the subject, so your WAM in ECON30005 turns on exam mastery. Use SWOTVAC to drill the OLG, Diamond-Dybvig and Taylor-rule models that recur across true/false, short essays and the worked question.
How ECON30005 is assessed
| Component | Weight | Format |
|---|---|---|
| Tutorial participation | 10% | In-class participation, weekly from Week 2 (attend at least 10 of 11 tutorials, 1 mark each) |
| Pre-tutorial Canvas quiz | 10% | Weekly online quiz from Week 2; five MCQ/true-false on the previous week's lectures, due 10am Monday (raw score ×1.25, capped at 10) |
| Assignment 1 | 10% | Group written assignment (up to 4 students, ~800 words), due Week 6 — confirm the date on Canvas |
| Assignment 2 | 10% | Group written assignment (up to 4 students, ~800 words), due Week 11 — confirm the date on Canvas |
| Final examination | 60% | 2-hour closed-book end-of-semester exam (true/false, short essays and a worked model); Casio FX82 permitted |
The costly-state-verification optimal debt contract (Section 3 archetype)
- +2Role of the bank. With many small lenders, monitoring is a public good — everyone free-rides or everyone duplicates the cost. A bank arises as a delegated monitor: it takes deposits promising the gross rate R_d, lends the whole B under a standard debt contract with a fixed promised repayment D, and verifies only when the entrepreneur defaults. Debt is optimal under costly state verification because it needs monitoring only in the default state, not in every state (as equity would).
- +2Bank payoff by state. In the high state the entrepreneur can repay, so the bank receives D. In the low state the entrepreneur defaults; the bank pays K to verify and seizes what is left, y_L − K = 70 − 12 = 58. Monitoring occurs only in default.
- +2Zero-profit condition. Competition drives the bank's expected profit to zero: p·D + (1−p)(y_L − K) − R_d·B = 0. Substitute: 0.75·D + 0.25·(58) − 1.05·(70) = 0.
- +2Solve for D. 0.75·D + 14.5 − 73.5 = 0 → 0.75·D = 59 → D = 78.67. (Check the contract is genuine: y_H = 150 > D = 78.67, so repayment is feasible in the good state, and y_L − K = 58 < D, so default is a real loss.)
- +1Gross lending rate. R_L = D/B = 78.67/70 = 1.1238, i.e. a net lending rate of about 12.4%. The spread over the 5% deposit rate compensates the bank for expected default losses and monitoring costs.
- +1Comparative static (net worth 30 → 50). A higher net worth means a smaller loan (B = 50), so the bank's loss in the default state is smaller and it needs a smaller spread to break even: the lending rate falls. This is the 'skin in the game' result — borrower net worth lowers the external-finance premium.
Key terms
- Quantity theory of money (MV = PY)
- The equation of exchange: money supply M times velocity V equals the price level P times real output Y. Always true as an identity; it becomes a theory of inflation once V is assumed stable and Y is at potential, giving π ≈ money growth − output growth.
- Money neutrality
- The proposition that a one-off, permanent change in the money supply changes only nominal variables (the price level rises equiproportionately) and leaves real variables — output, capital, the real interest rate — unchanged. It holds in the long run in the OLG model; short-run non-neutrality can arise from unanticipated injections.
- Money multiplier
- The maximum expansion of deposits from an injection of reserves in the textbook model: 1/(required reserve ratio). A ceiling, not a mechanism — the modern view is that bank lending creates deposits and reserves adjust, and several economies (including Australia) have no reserve requirement.
- Diamond-Dybvig demand-deposit contract
- A contract (c1, c2) that pools depositors' funds to insure against idiosyncratic liquidity shocks: impatient depositors withdraw c1 in period 1, patient depositors receive c2 in period 2, with the optimum characterised by u′(c1) = βR·u′(c2) and satisfying 1 < c1 < c2 < R. It creates liquidity but admits a self-fulfilling bank-run equilibrium under sequential service.
- Taylor rule
- A monetary-policy reaction function: i = π + r* + w_π(π − π*) + w_y(y − y*). The Taylor principle requires w_π > 0 so nominal rates rise more than one-for-one with inflation, raising the real rate to stabilise inflation.
- Policy trilemma (impossible trinity)
- A country can have only two of: a fixed exchange rate, free capital mobility and independent monetary policy. Fixing the rate with open capital markets forces the domestic policy rate to track the anchor country's, so monetary independence is lost.
ECON30005 FAQ
Is ECON30005 hard?
It is demanding because it fuses macroeconomic theory with finance and leans on a handful of models you must be able to derive, not just describe — the overlapping-generations (OLG) money model, the costly-state-verification debt contract and the Diamond-Dybvig bank-run model are the ones students find hardest. The mathematics is intermediate (single-variable optimisation, the Fisher relation, geometric series for the money multiplier), and the exam rewards clean, mark-by-mark working over memorised prose. Because the final exam is worth 60% and carries a 50% hurdle, breadth matters: you need to be able to start every topic. Students who redo the OLG, CSV and Diamond-Dybvig derivations each week — rather than cramming them in SWOTVAC — tend to find it manageable, and steady work protects your WAM.
Can AI help me with ECON30005?
Yes, as a step-by-step study aid. Sia is an AI tutor built to mirror how ECON30005 is actually taught and assessed at the University of Melbourne: it can walk you through an OLG money-demand derivation, a money-multiplier calculation, a Diamond-Dybvig (c1, c2) problem or a Taylor-rule computation one line at a time, and it checks your reasoning as you go. Bring your own tutorial or past-paper question and ask Sia to explain each step. It does not do graded assessment for you — University of Melbourne academic-integrity rules apply to the quizzes and assignments — so use it to understand the method, not to produce work you submit.
Where can I find past exam papers / practice for ECON30005?
Start on Canvas, where the subject posts its exam-preparation material, including the practice exam that states it follows 'the same format and similar coverage as the final exam', and search the University of Melbourne Library's past-examination collection for any released papers. Your weekly tutorial questions and their solutions are the closest match to the short-essay and worked-model sections. This guide also includes a re-authored practice exam that mirrors the paper's shape — a true/false section, short essays and a worked model such as the costly-state-verification contract — with fresh numbers, and you can ask Sia to generate extra practice in the same style and explain each step. Treat any third-party 'model answers' with caution and confirm what is officially provided on Canvas.
What are the ECON30005 hurdles and assessment rules?
The confirmed hurdle is the final exam: you must score at least 50% on the 2-hour closed-book end-of-semester examination to pass the subject, no matter how well you did on the 40% of continuous assessment. That continuous assessment is tutorial participation (10%, attend at least 10 of 11 tutorials at 1 mark each), a weekly pre-tutorial Canvas quiz (10%, five questions on the previous week's lectures due 10am Monday, raw score scaled ×1.25 and capped at 10) and two group written assignments (10% each, up to four students, about 800 words). A Casio FX82 calculator is permitted in the exam. Confirm the exact weights, due dates and permitted materials on Canvas and the UniMelb Subject Guide, since details can change year to year.
What is on the ECON30005 final exam?
A single 2-hour closed-book paper worth 60 marks that spans the whole subject, following the practice-exam pattern in three sections: Section 1, true/false statements (about 20 marks) across the syllabus — quantity theory, OLG neutrality, hyperinflation and velocity, modern money creation, Diamond-Dybvig belief-driven runs, interest on reserves, inflation targeting, the trilemma and foreign-currency debt; Section 2, short-essay questions (about 30 marks, roughly five at six marks each) asking you to explain a mechanism; and Section 3, a worked model (about 10 marks) such as the costly-state-verification optimal debt contract, the OLG steady state or the Diamond-Dybvig contract. A Casio FX82 calculator is permitted. The exam sits in the University of Melbourne Semester 1, 2027 examination period (around June 2027) — confirm the exact date, time and room on Canvas and the UniMelb exam timetable.
How to study for the exam
Treat ECON30005 as a small set of models you can reproduce under pressure rather than a reading subject, and rehearse them weekly rather than in SWOTVAC. Build a one-page derivation sheet for the three exam-critical models — the OLG money model (budget constraints, the money-demand equation m/P = θ(1 + 1/i)w, price determination P = M/[N(w − k)], and why steady-state capital does not depend on M), the costly-state-verification contract (zero-profit condition, solving for D, the lending rate D/B, and the net-worth comparative static), and Diamond-Dybvig (the resource constraint, the FOC u′(c1) = βR·u′(c2) and the ordering 1 < c1 < c2 < R) — and redo each from a blank page every week. Drill the small calculations that recur in true/false and short essays: the exact nominal rate (1 + i) = (1 + r)(1 + π) versus the Fisher approximation, the money multiplier 1/rr, the Taylor rule, and PPP real-versus-nominal depreciation. For the short-essay section, practise structured mark-by-mark answers (why intermediation exposes banks to risk; how securitisation changed banking pre-GFC; the Asian-crisis current-account reversal) — two to four scorable points each. Because the exam carries a 50% hurdle, cover breadth first so you can attempt every question, then deepen the models you find hardest. When a step will not click, ask Sia to explain that single step a different way and set you a fresh practice question in the same style; it teaches the method and checks your reasoning, and it never substitutes for your own graded work. Confirm the exam date, room and permitted materials on Canvas and the University of Melbourne exam timetable.
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