Current Economic Analysis
Week 7: Personal Assignment
There are Internet questions with this assignment at the end.
You have just inherited $100,000 from your rich uncle Sam. Being the conservative sort, you rush to your local bank and deposit the entire windfall. The reserve requirement is currently 10 percent. What is the immediate impact on the balance sheet of the bank? Reserve Account = 10% * 100,000 = $ 10,000
Cash Account = $ 100,000- $10,000 = $ 90,000
Liability account = $ 100,000
Mention each account affected and the appropriate amount. The Reserve account of the company is increased by $ 10,000; cash account of the bank is increase by $ 90,000, while the liability of $ 100,000 has been aroused. Also, assuming your bank lends out money to the extent allowed by law, how much will the money supply grow beyond the initial $100,000 deposit? The money supply increase = $ 100,000* Multiplier = Where required reserve= 0.10 Multiplier = Multiplier = 10, Money Supply = $ 100,000* 10 = $1000,000 The total of the $ 900,000 (1,000,000) money supply would grow beyond the initial $ 100,000 deposit to the extent allowed by law
Explain thoroughly why credit cards are not technically money. Credit- card purchases really is just a pre-approved loan. Its only part of the transaction, since the merchant then goes to the bank that issued the credit card to get money. Then the banks sends you a bill which must be paid with money. When you use a credit card you do not provide spending power. You simply indicate that the issuing bank would make payment on your behalf in the future. In the long run you will have to pay it back.
Come up with an alternative money to currency. Remember, currency is cash. Do not use any of the other forms of money, such as checks, debit cards, etc. (Also, please do not use precious metals or jewels). Justify your selection using the three characteristics of money.
I will be using Walnuts for an alternative money to currency. Medium of Exchange-- Medium of exchange means that walnuts will be widely accepted in exchange for goods and services. It stimulates and increases trade by providing an easy method of exchange. Since Walnuts are small and portable, walnuts will be an effective medium of exchange. Store of Value-- Means that walnuts has the ability to hold value over time. This makes walnuts a useful mechanism for transforming income in the present into future purchases. Standard of Value-- This function of walnuts provides a common measurement of the relative value of goods and services. Without walnuts how would governments collect taxes?
Under what circumstances might the Fed want to shrink (contract) the money supply? Be sure to relate your answer to the resulting effect on the Aggregate Demand/Aggregate Supply model. The main reason why the Fed wants to shrink the money supply is to achieve their policy goals. They simply want to alter the money supply. This is achieved through raising the federal discount rate, reducing the monetary base through open market operations, and increasing reserve requirements. The Fed is likely to decrease the money supply during times of high output and high inflation. The reason is that this gives the Fed opportunity to keep inflation in check without doing much harm to output.
Assuming the Fed chooses to shrink the money supply, explain how each of the three tools would be used. If the fed chooses to shrink the money supply the open-market sale of bonds to the public will take bank reserves out of the system, which would result in a decline in deposits and hence a decline in the money supply. Now if the fed reduces its lending to banks at the discount window, again bank reserves will fall and deposits will fall will also result in a decline in...
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