ak_macro_ch07.pdf - AK Macroeconomics Chapter 7 CHAPTER...

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AK Macroeconomics – Chapter 7 47 CHAPTER SEVEN Answers to Self-Test Questions 1. Adam Smith's reference to money as a veil means that it can often conceal the real activities of production and exchange. If we strip money away what we see are physical resources, such as labour and machinery, producing physical goods, such as food and housing, which are then exchanged for other physical goods. 2. 10 suits of cloth 3. Commodity money is a type of money that can also function as a commodity. In other words, commodity money has intrinsic value. Fiat money on the other hand may have no value in itself but has value because it is declared money by government order. 4. a) No, the money supply has not changed; the amount of money in circulation has decreased and the amount of demand deposits has increased, the total remains the same. b) Yes, M1 is now less because there will be less demand deposits. No, M2 does not change because although there are more notice deposits there are now less demand deposits,. (M1 is part of M2 and therefore M2 remains the same. 5. M1: $112 (coins, notes & demand deposits); M2: $327 (M1 + notice and personal term deposits); M3: $464 (M2 + certificates of deposit). 6. a) Loans: + $2000; Demand Deposits: + $2000 b) Reserves: – $2000; Demand Deposits: $2000 7. a) target reserves: $4800 b) target reserves: $3000 8. a) excess reserves: $200 b) excess reserves: $2000 9. a) increase in total deposits: $10 000 b) increase in total deposits: $40 000 10. a) increase loans by: $1200 b) increase loans by: $3000 c) increase loans by: $15 000 and $60 000
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