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    BAFB1033 Topic Review5 MC200911851

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    This document contains an economics student's answers to several questions about macroeconomics topics including money, monetary policy, and banking. In response to a question about why cigarettes emerged as currency in POW camps, the student explains that cigarettes took on greater value than money since assets were seized, and cigarettes provided stability and could meet demand. The student also constructs balance sheets to show the effects of deposits and required reserves on commercial banks, and calculates total deposits, reserves, and loans created in the banking system from these transactions. Finally, the student explains that expansionary monetary policy aims to reduce unemployment by stimulating the economy, while contractionary policy is used to fight inflation when consumers hoard in anticipation of higher prices.

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    BAFB1033 Topic Review5 MC200911851

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    shuba shny
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    This document contains an economics student's answers to several questions about macroeconomics topics including money, monetary policy, and banking. In response to a question about why cigarettes emerged as currency in POW camps, the student explains that cigarettes took on greater value than money since assets were seized, and cigarettes provided stability and could meet demand. The student also constructs balance sheets to show the effects of deposits and required reserves on commercial banks, and calculates total deposits, reserves, and loans created in the banking system from these transactions. Finally, the student explains that expansionary monetary policy aims to reduce unemployment by stimulating the economy, while contractionary policy is used to fight inflation when consumers hoard in anticipation of higher prices.

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    BAFB1033_Topic_Review5_MC200911851

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    This document contains an economics student's answers to several questions about macroeconomics topics including money, monetary policy, and banking. In response to a question about why cigarettes emerged as currency in POW camps, the student explains that cigarettes took on greater value than money since assets were seized, and cigarettes provided stability and could meet demand. The student also constructs balance sheets to show the effects of deposits and required reserves on commercial banks, and calculates total deposits, reserves, and loans created in the banking system from these transactions. Finally, the student explains that expansionary monetary policy aims to reduce unemployment by stimulating the economy, while contractionary policy is used to fight inflation when consumers hoard in anticipation of higher prices.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    179 views3 pages

    BAFB1033 Topic Review5 MC200911851

    Uploaded by

    shuba shny
    This document contains an economics student's answers to several questions about macroeconomics topics including money, monetary policy, and banking. In response to a question about why cigarettes emerged as currency in POW camps, the student explains that cigarettes took on greater value than money since assets were seized, and cigarettes provided stability and could meet demand. The student also constructs balance sheets to show the effects of deposits and required reserves on commercial banks, and calculates total deposits, reserves, and loans created in the banking system from these transactions. Finally, the student explains that expansionary monetary policy aims to reduce unemployment by stimulating the economy, while contractionary policy is used to fight inflation when consumers hoard in anticipation of higher prices.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    of 3

    BAFB1033

    MACROECONOMICS
    TOPIC 5
    MONEY AND MONETARY POLICY

    Name: FUNG JIA YUEN


    Matric number: MC200911851

    Question 1
    a) What is the main problem with a barter system? Briefly explain and give an appropriate
    example.

    In barter system, there was not any measurable means of payment for the purchase of
    goods and services. Money or currency was not introduced at the point in time hence,
    people often trades off or exchanges among one another for the goods both parties equally
    agreed upon. This poses a problem where we are not able to find or put an exact value
    onto the goods and services offered and desired.

    b) State the function of money for each statement below and explain your answer:

    i) Before Ahmed buy a new car, he visits four local dealerships and collect information on
    the prices and features of the cars.

    Money functions as unit of account. In this scenario, Ahmed (the customer) will compare
    cars based on their features and pricings. Without money, he will not be able to put a price
    tag based on their worth and value perceived. Money helps to simplify the process In his
    decision making process in the sense that “more expensive car will require more goods
    purchased hence, less favorable”.

    ii) Ahmed has recently bought a new Samsung Galaxy Note II mobile phone.

    Money functions as a medium or exchange, just as how Ahmed used the money for his
    mobile phone purchase. Ahmed generated income is paid in monetary form and not in
    other commodities. So similarly, he needs to use these money in exchange of goods
    purchasing.

    iii) Ahmed keeps his money in the saving accounts, one of the banking facilities offered by
    Maybank.

    Money functions as store of value. Excess money can be stored and saved into bank as
    the most basic and direct way to start a savings for oneself. Bank being one of the safest
    places to store ones monetary asset is easily available for those who wishes to save for the
    future. Of course, money can be saved in other forms such as gold, jewelry and goods (not
    limited to only cash) due to concern of inflation rate for the future.

    1
    iv) Ahmed’s mother loaned him RM1,800 for him to buy a brand-new Samsung Galaxy Note
    IV mobile phone and promised to pay back his mother next month.

    Money here functions as the standard of deferred payments. This is illustrated when
    Ahmed took a loan of RM1800 from his mother in present times (advanced) which he will
    then repay in the same form. To simply put it, Ahmed purchased himself a new phone
    using money in advance of the time he will be able to earn those money. Hence, we can
    say that these money here helps Ahmed to deferred his payment for the phone.

    Question 2
    During World War II, cigarettes were used as money in prisoner of war camps. Considering
    the attributes that good money should possess, why would cigarettes emerge as money
    among prisoners?

    As prisoner, all assets in monetary forms are seize. This makes cigarette (as money)
    possesses more importance during war than plain money value. The use of cigarettes as
    currency provided some stability and are able to cater to the its demand within the prisoner
    of war camps. At those times, the number of cigarettes hold by one is the way to measures
    one’s wealth in the prison as well.

    Question 3
    Suppose that all commercial banks in Arora have zero excess reserve, and the public must
    keep their money in the bank. Fairytale Bank is one of the commercial banks in Arora.
    Fairytale Bank receives a cash deposit of $570,000 by Mr. Mufasa who opens up a new
    checking account. Assume that a required reserve ratio is 13 per cent.

    Based on the information given:


    a) Construct a balance sheet for Fairytale Bank.

    Require reserved $ 74,100


    Loan $495,900
    Total Assets $570,000
    Demand deposit $570,000

    How to compute for require reserve: $570,000 x 13% = $74,100


    Loan is an asset that the bank can use earn interest
    Demand deposit is a liability that the bank owes to depositor Mufasa.

    2
    b) If the whole amount of the excess reserve in the Fairytale Bank is lent out to Mrs. Puff,
    who then deposited the money in the Lion King Bank, construct the balance sheet for
    the Lion King Bank. [Assume that the Lion King Bank holds no initial deposits.]

    Require reserve $ 64,467


    Excess reserve $431,433
    Total Assets $495,900
    Demand Deposit $495,900

    Lion King receives a deposit from Mrs. Puff amounting to $495,900 x 13% = $64,467
    Excess reserve of $431,433 is taken up.
    Demand deposit forms part of its liability to depositor Mrs. Puff.

    c) Calculate the total deposits, total reserves and total loans created by this economy.

    Total deposits $1,065,900


    Total reserves $ 138,567
    Total loans $ 495,900

    Mr. Mufasa to Fairy-tale = $ 570,000


    Mrs. Puff to Lion King = $ 495,900
    Total deposits = $1,065,900

    Fairy-tale = $ 74,100
    Lion King = $ 64,467
    Total reserves = $138,567
    Loans (granted to Mrs. Puff only) = $495,900

    Question 4
    Why should the government opt for expansionary monetary policy during unemployment
    and contractionary monetary policy during inflation?

    Expansionary monetary policy is to add money which stimulates the economy. It reduces
    unemployment in the stimulation of capital investments and thereby giving additional jobs in
    the economy. Most banks help by lowering interest rates. The result is an increase in
    aggregate demand which boosts growth as measured by gross domestic product. It lowers
    the value of the currency, thereby decreasing the exchange rate.
    Contractionary monetary policy, also called restrictive money policy, is used to fight
    inflation. This is when people buy too much now to avoid paying higher prices later, in
    short, hoarding. This consumer buying mentality may cause businesses to produce more to
    take advantage of higher demand. And if they can't produce more, prices tend to go higher.

    ***End of Exercise Questions***

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