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Page 318 1. In a barter economy traded products themselves serve as a means of exchange. Particular durable items are kept as a store of purchasing power, and there is no common unit of account. All three of these choices mean that the three functions of money are not as effectively performed as they could be in an economy with money. Using traded products as a means of exchange is cumbersome because a coincidence of wants is required before exchange can take place. The use of particular durable items as a store of purchasing power is inconvenient, because while they are being stored it is impossible to consume them. Finally, given that there is no single unit of account, there is a multiplicity of relative values in a barter economy. 2a. M1 is the sum of currency outside chartered banks and publicly held demand deposits at chartered banks, or $54 billion [= ($20 b. + $34 b.)]. b. M2 is the sum of M1 and notice and personal term deposits at chartered banks, or $211 billion [= ($54 b. + $157 b.)]. Page 322 1a. With a nominal interest rate above its equilibrium level, there is a surplus in the money market. This surplus of money means that people will try to get rid of money and buy financial assets such as bonds. The result is a rise in the prices of these financial assets and a fall in the nominal interest rate until money market equilibrium is achieved. b. When the nominal interest rate is below its equilibrium level, the money market exhibits a shortage. People will try to acquire money by selling financial assets such as bonds. This causes a fall in the prices of these financial assets, and a rise in the nominal interest rate until the achievement of money market equilibrium. 2a. The bond’s annual interest payment is $1000 [= ($20 000 x .05)]. b. Because newly issued $20 000 bonds provide only $400 [= ($20 000 x .02)] per annum, this bond will have a price that is 2.5 [= ($1000/$400)] as much, or $50 000. c. Newly issued $20 000 bonds now provide $2000 [= ($20 000 x .10)] per annum. This bond will therefore have a price that is .5 [= ($1000/$2000)] as much, or $10 000. Page 327 1a. The bank’s reserve ratio of 4 percent [= (($40 000/$1 million) x 100)] is found by dividing desired reserves by deposits and multiplying the result by 100. b. The bank’s desired reserves increase by $4000 [= ($100 000 x .04)]. This is found by multiplying the increase in deposits by the reserve ratio. The bank’s excess reserves increase by $96 000 [= ($100 000 - $4000)]. This is found by subtracting the increase in desired reserves from the increase in deposits. 2a. The initial change in excess reserves is found by subtracting the $12 [= ($200 x 0.06)] increase in desired reserves from the $200 increase in total reserves, or $188 [= ($200 - $12)]. b. The maximum amount by which the money supply can change is found by multiplying the initial change in excess reserves by the money multiplier, or $3133.33 [= ($188 x (1/.06)]. |