Tutorial_7_-_Money_Supply_and_Money_demand

# Tutorial_7_-_Money_Supply_and_Money_demand - 5 Suppose that...

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1 Tutorial 7 – Money Supply and Money Demand 1. Why might a banking crisis lead to a fall in the money supply? 2. 2002 2006 Currency 3.9 5.5 Reserves 3.2 2.9 rr 0.14 0.21 cr 0.17 0.41 i. Calculate the money supply in 2002 and 2006 respectively. ii. Calculate the percentage fall in the money supply between 2002-2006. iii. Calculate the change in the money supply between 2002-2006 if the currency deposit ratio changes as shown in 2006, but the reserve-deposit ratio stays at its 2002 value. iv. Calculate the change in the money supply between 2002-2006 if the reserve deposit ratio changes as shown in 2006, but the currency-deposit ratio stays at its 2002 value. v. Which of the two changes is more responsible for the overall change in the money supply from 2002-2006? 3. In what way does the existence of near money complicate the conduct of monetary policy? 4. According to the Baumol-Tobin model, what determines how often people go to the bank? What does this decision have to do with money demand?

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Unformatted text preview: 5. Suppose, that you spend \$11,000 per year on goods and services of which \$6000 is with the use of credit cards and cheques, that it takes you on average 30 minutes to go to the bank, you earn \$10 per hour and the nominal interest rate is 5%. According to the Baumol-Tobin model: i. What is your value of Y? ii. What is your value of F? iii. How many times should you go to the bank each year? iv. How much should you withdraw each time? 2 6. Suppose that commercial banks in their ongoing scheme to rob customers blind implement a \$2 charge on customers for every transaction over 2 transactions a month, whether it be an ATM transaction or a visit to the teller. i. How do you think this \$2 charge will affect the currency-deposit ratio? ii. According to the model of fractional reserve banking how does this charge affect the money supply? iii. Would this policy be a good policy to implement if the economy was in a downturn?...
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## This note was uploaded on 11/12/2011 for the course ECON 2003 taught by Professor Macoeconomics2 during the Spring '10 term at University of the West Indies at Mona.

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Tutorial_7_-_Money_Supply_and_Money_demand - 5 Suppose that...

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