Econ+310+Winter+2010+assignment+questions

Econ+310+Winter+2010+assignment+questions - Economics 310...

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Assignment Questions University of Michigan Winter 2010 Economics 310 Money and Banking
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Econ 310 Winter 2010 Assignment Questions Question One Agro is a simple economy. All economic agents own land which they can devote to farming. Farms in Agro produce only three commodities: wheat, cattle and arugula. Farms in Agro are varied in their characteristics, and farmers are varied in their skills. As a result, each farmer is endowed with a different production technology. This means that the relative quantities of wheat, arugula and cattle produced will vary across farms. In addition, farmers are able to devote some of their time to various services: milling wheat into flour, baking bread, tossing salads, butchering cattle and making roast beef and arugula sandwiches. Again, the varied production technologies of the various farmers will imply that any two farmers are likely to choose completely different ways to allocate their time between farming and these other activities. In this economy the following commodities will potentially be traded: farm land, wheat, cattle, arugula, beef, flour, bread, salad and roast-beef-and-arugula sandwiches. (a) Explain what is meant by “double coincidence of wants, and why it poses an impediment to efficient trade in a barter economy. (b) Choose three of the traded commodities and discuss the merits of each as a potential form of “commodity money.” Be sure to address how each would fare filling the three roles of money discussed in class: as a store of value, as a unit of account and as a medium of exchange. Which of the commodities would you anticipate would be embraced as commodity money? Explain why. Question Two Textbooks (including ours) identify three roles for money: money is a unit of account, a store of value and acts as a medium of exchange. Give a brief description of these terms, highlighting the “problem” that money is solving in each case. Are these three roles independent of each other? To address this question, think about the following. Suppose money exists in an economy, and fulfills all three roles mentioned above. Now suppose that the government directs the central bank to print large quantities of extra currency, and uses that currency to buy goods and services. What do you predict will happen to the currency as a store of value? Will it make sense for the unit of currency to remain the unit of account? In view of the changes you list here, do you think that the currency will continue to be accepted as a medium of exchange? Can you find historical examples of situations where these changes occurred? If the local currency is rejected as a unit of account and a medium of exchange, what alternatives might be found to take its place?
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Econ 310 Winter 2010 Question Three Using T-accounts, show what happens to the money base, bank reserves and checkable deposits in the banking system when the Fed sells $2 million worth of bonds to the First National Bank. Using the simple model of multiple deposit creation, state the ultimate impact on M1 from the
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This note was uploaded on 09/28/2010 for the course ECON 310 taught by Professor Hogan during the Winter '08 term at University of Michigan.

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Econ+310+Winter+2010+assignment+questions - Economics 310...

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