The basic functions of money
|Perfect Number of Pages to Order||5-10 Pages|
(Directions: Answer questions neatly & in order & on separate sheet or sheets of paper.)
1. What are the basic functions of money, i.e., what services does money provide?
2. In the liquidity demand for money function, what does Dt represent? What determines the Dt demand for money? What does Da represent and what determines it? In words, how is the equilibrium rate of interest determined according to the analysis presented in class and your textbook?
3. Given the following reserve ratio, find maximum (potential) amount of (checkable deposit) money the private banking system can create, with a deposit into checking accounts of $200 million. (Assume that banks are all loaned-up).
b. What two assumptions were made in your above calculations?
4. Assume the economy appears to be slowing & fears of recession are on the rise. Starting with the money market diagram, with words & diagrams (including the aforementioned MMD, the investment demand & AS/AD diagrams), work through the (monetary) transmission mechanism, given the appropriate type of monetary policy.
5. What is the difference between the Classical and (simple) Keynesian aggregate supply curves? Draw a graph of each.Explain why the respective curves look the way they do.
****SHORT ANSWER HINTS
1. Breakdown the liquidity preference demand for money function (& why are bond prices & interest rates inversely related)
2. See question 4 above
3. Compare & contrast the 3 schools of modern macroeconomic thought discussed in class & the text (this includes “Keynesianism”, Monetarism & Rational Expectations Theory)
4. there is no number 4