Unit 9 Problem Set 1: Monetary Policy and Inflation
1. Consider an economy that uses gold as its currency. Define each of the three properties of money listed below. Considering these properties, is gold a good monetary system?
a. Medium of exchange: any item that buyers give to sellers when they purchase goods and services.
b. Unit of account: a standard unit in which prices can be stated and the value of goods and services can be compared.
c. Store of value: the property of money that holds that money preserves value until it is used in an exchange.
d. Is gold a good monetary system? Gold standard works for a while. It is just that we are running out of gold. It was ...view middle of the document...
4. Suppose the Federal Reserve increases the reserve ratio from 0.1 to 0.15.
a. What was the money multiplier when the ratio was 0.1? 10
b. What is the new money multiplier under the new 0.15 ratio? 15
c. By how much will the money multiplier decrease or increase? Increase by 5
d. If the total amount of money in the economy was $1,000,000, by how much will the total amount of money change after the new ratio is implemented?
With the new ratio of 1.5 the multiplier is 15 and would be $15,000,000
e. Will this cause an expansion or recession in the economy, everything else equal?
This will cause an expansion because we have an increase in money supply so more money to spend so more demand on goods and services more production more expansion.
5. List the four “jobs” of the Fed
1. Fed supplies currency to the economy – An important function of the Federal Reserve is ensuring that enough cash—that is, currency and coin—is in circulation to meet the public's demand. When Congress established the Federal Reserve, it recognized that the public's demand for cash is variable.
2. Fed provides a system of check collection and clearing – this is a good thing that the system check-clearing system. The system was to provide not only an elastic currency, which is, a currency that would expand or shrink in amount as economic conditions warranted but also an efficient and equitable check-collection system title
3. Fed holds reserves form banks and other depository institutions and regulates banks – Services performed for the Treasury include maintaining the Treasury's bank account; processing payments; and issuing, safekeeping, and transferring securities. Fiscal services performed for other entities are generally securities-related. The Treasury and other entities reimburse the Reserve Banks for the expenses incurred in providing these services.
4. Fed conducts monetary policy - The Reserve Banks provide several types of services to these organizations, including maintaining non-interest-bearing deposit accounts (in U.S. dollars),...