Essay on Monetary Policy and Inflation

Submitted By Joel-Martens
Words: 986
Pages: 4

9 Problem Set 1: Monetary Policy and Inflation
Joel Martens

1. Consider an economy that uses gold as its currency. Define each of the three properties of money listed below. Considering these properties, is gold a good monetary system?

a. Medium of exchange: any item that buyers give to sellers when they purchase goods and services.

b. Unit of account: a standard unit in which prices can be stated and the value of goods and services can be compared.

c. Store of value: the property of money that holds that money preserves value until it is used in an exchange.

d. Is gold a good monetary system? Gold standard works for a while. It is just that we are running out of gold. It was supposed to keep the government in check for the amount of money that it could print, but then in times of trouble it would use the gold as an emergency fund that it would have to pay back, sometime. It use to work in international trade systems on larger scale because of different types of currency. We now have the fiat money which is just money that the government can have better control on.

2. Given your answers to the previous question, explain whether you think gold had advantages over the use of fiat money.

You can’t just print gold like you can paper money. When you have the ability to just print money, everything else will also go up in price because there is no real value to paper money. Gold has a better value to it because you know that if you don’t have it, you will get nothing in return so it would keep you in check.

3. Growth in Federal Reserves:

a. Do banks prefer to keep reserves or make loans when reserves do not pay interest? If the bank makes no money while that money is sitting in the bank, it would want to loan it out to make an interest on it. So loan it out.

b. What would be the danger if the Federal Reserve set an interest rate on reserves close to the market interest rate on loans? By increasing the interest rate paid on reserves, the Fed will be able to put upward pressure on market interest rates because banks will not want to lend to the public at rates significantly below what they can earn by holding reserves with the Fed.

4. Suppose the Federal Reserve increases the reserve ratio from 0.1 to 0.15.

a. What was the money multiplier when the ratio was 0.1? 10

b. What is the new money multiplier under the new 0.15 ratio? 15

c. By how much will the money multiplier decrease or increase? Increase by 5

d. If the total amount of money in the economy was $1,000,000, by how much will the total amount of money change after the new ratio is implemented?

With the new ratio of 1.5 the multiplier is 15 and would be $15,000,000

e. Will this cause an expansion or recession in the economy, everything else equal?

This will cause an expansion because we have an increase in money supply so more money to spend so more demand on goods and services more production more expansion.

5. List the four “jobs” of the Fed

1. Fed supplies currency to the economy – An important function of the Federal Reserve is ensuring that enough cash—that is, currency and coin—is in circulation to meet the public's demand. When Congress established the Federal Reserve, it recognized that the public's demand for cash is variable.

2. Fed provides a system of check collection and clearing – this is a good thing that the system check-clearing system. The system was to provide not only an elastic currency, which is, a currency that would expand or shrink in amount as economic conditions warranted but also an efficient and equitable check-collection system title

3. Fed holds reserves form banks and other depository institutions and regulates banks – Services performed for the Treasury include maintaining the Treasury's bank account; processing payments; and issuing, safekeeping, and