Econ291_Tut06 (1)

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Jan 9, 2024

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SFU Econ 291: Tutorial #6 Joshua F. Boitnott, PhD 1. (ABCK Book - Ch. 7, Review Questions: #1) Define money. How does the economist’s use of this term differ from its everyday meaning? 2. (ABCK Book - Ch. 7, Review Questions: #2) What are the three functions of money? How does each function contribute to a more smoothly operating economy? 3. Your roommate is considering purchasing cryptocurrency, as they believe it can be used in place of money. Can cryptocurrency function as money? 4. The government of Eastlandia uses measures of monetary aggregates similar to those used by Canada, and the central bank of Eastlandia imposes a required reserve ratio of 10%. Given the following information, answer the questions below. Bank deposits at the central bank = 200 million Currency held by public = 150 million Currency in bank vaults = 100 million Chequable bank deposits = 500 million (a) What is M1+ (i.e the money supply)? (b) What is the monetary base? (c) Are the commercial banks holding excess reserves? (d) Can the commercial banks increase chequable bank deposits? If yes, by how much can chequable bank deposits increase? (e) Suppose the governemnt removes the reserve requirements and moves to a system without limited reserves and a capital requirement (such as the leverage ratio). How would this change your answer to the previous question? 5. The average bank in country of EconoLand currently has 4,000,000 in Deposits, Re- serves of 1,000,000, Securities of 1,000,000, and Loans of 2,500,000. Draw the T-Account for the average bank. What is the Bank Capital and Leverage Ratio under the current system?

6. Suppose the Central Bank of EconoLand has decided to increase the money supply. To make life simpler, suppose the current Central Bank and a commercial bank T- accounts are shown. Creating your own T-account for the Central Bank of EconoLand and a commercial bank give a brief explanation of open market operations for the Central Bank using T-bills valued at 12 million EconoBucks. ( Note : you can focus on change in the T-accounts and do not have to use the entire T-account shown below.) Table 1: Central Bank of EconoLand Assets Liabilities T-Bills 2,437 million Monetary Base 2,437 million Table 2: Commercial Bank of EconoLand Assets Liabilities Reserves 2 million Deposits 100 million Loans 70 million T-Bills 36 million Bank Capital 8 million

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