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Macro Exercise Ch.4

This document contains 4 exercises from a macroeconomics textbook chapter on money and banking. The exercises involve calculating money supply, monetary base, currency-deposit ratios and reserve-deposit ratios given scenarios about the banking systems and economies of fictional nations Wiknam and Panicia. It also asks the reader to analyze how changes to these ratios during the Great Depression affected the money supply, and whether a check tax implemented in the US in 1932 would have impacted the money supply and severity of the Depression.

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Daisy Misty
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207 views

Macro Exercise Ch.4

This document contains 4 exercises from a macroeconomics textbook chapter on money and banking. The exercises involve calculating money supply, monetary base, currency-deposit ratios and reserve-deposit ratios given scenarios about the banking systems and economies of fictional nations Wiknam and Panicia. It also asks the reader to analyze how changes to these ratios during the Great Depression affected the money supply, and whether a check tax implemented in the US in 1932 would have impacted the money supply and severity of the Depression.

Uploaded by

Daisy Misty
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Program Studi S-1

FEB-UGM
Makroekonomi 1
Hengki Purwoto

Exercise 3 (Ch. 4)

1. In the nation of Wiknam, people hold $1,000 of currency and $4,000 of demand deposits in the
only bank, Wikbank. The reserve–deposit ratio is 0.25.
a. What are the money supply, the monetary base, and the money multiplier? What share of
output does labor receive?
b. Assume that Wikbank is a simple bank: it takes in deposits, makes loans, and has no capital.
Show Wikbank’s balance sheet. What value of loans does the bank have outstanding?
c. Wiknam’s central bank wants to increase the money supply by 10 percent. Should it buy or
sell government bonds in open-market opera- tions? Assuming no change in the money
multiplier, calculate, in dollars, how much central bank needs to transact.
2. In the economy of Panicia, the monetary base is $1,000. People hold a third of their money in
the form of currency (and thus two-thirds as bank deposits). Banks hold a third of their deposits
in reserve.
a. What are the reserve–deposit ratio, the currency–deposit ratio, the money multiplier, and
the money supply?
b. One day, fear about the banking system strikes the population, and people now want to hold
half their money in the form of currency. If the central bank does nothing, what is the new
money supply?
c. If, in the face of this panic, the central bank wants to conduct an open-market operation to
keep the money supply at its original level, does it buy or sell government bonds? Cal-
culate, in dollars, how much the central bank needs to transact.
3. As a Case Study in the chapter discusses, the money supply fell from 1929 to 1933 because both
the currency–deposit ratio and the reserve–deposit ratio increased. Use the model of the money
supply and the data in Table 4-2 to answer the following hypothetical questions about this
episode.
a. What would have happened to the money sup- ply if the currency–deposit ratio had risen
but the reserve–deposit ratio had remained the same?
b. What would have happened to the money sup- ply if the reserve–deposit ratio had risen but
the currency–deposit ratio had remained the same?
c. Which of the two changes was more respon- sible for the fall in the money supply?
4. To increase tax revenue, the U.S. government in 1932 imposed a 2-cent tax on checks written on
bank account deposits. (In today’s dollars, this tax would amount to about 34 cents per check.)
a. How do you think the check tax affected the currency–deposit ratio? Explain
b. Use the model of the money supply under fractional-reserve banking to discuss how this tax
affected the money supply.
c. Many economists believe that a falling money supply was in part responsible for the severity
of the Great Depression of the 1930s. From this perspective, was the check tax a good policy
to implement in the middle of the Great Depression?

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