Macroeconomics of Middle Earth Essay example

9580 Words May 18th, 2016 39 Pages
Fernanda Matos De Oliveira

Welcome to Macroeconomics in Middle Earth!
Part 2*
Section 9
Treebeard runs the MENB (Middle Earth National Bank) with “ branches” over the Shire. Merry Brandybuck makes all a deposit in the Shire’MENB of $100 from the loot he s brought back from his travels in Wilderland.

'One felt as if there was an enormous well behind them, filled up with ages of memory and long, slow steady thinking; but their surface was sparkling with the present: like sun shimmering on the outer leaves of a
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*Quotes from The Lord of the Rings, or The Hobbit by JRR Tolkien. Nothing written in italics applies to the questions— s there just for Tolkien fun. Go forth and read!!! it’ Fernanda
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The council can use open market operations to expand money supply. What the economy basically needs is for monetary policy to ease its current policy stance. The council needs to purchase bonds and securities from the people on behalf of the government. By purchasing bonds and securities, money will be ploughed back to individuals. In addition, the council needs to lower the reserve requirements to increase the supply of money. This will mean that banks will be required to keep less in required reserves, thereby increasing the excess reserves given out as loans. LOOK AT THE HANDOUT 17 WHERE IT TALKS ABOUT WHAT HAPPENS TO
RESERVES WITH AN OM PURCHASE.
b) The Council wishes to decrease the money supply. Describe precisely how this would work through the required reserve ratio and effects on reserves.
If the council wishes to decrease money supply following an increase in inflation, it can choose to increase the required reserve ration. By doing this, required reserves will increase, and hence there will be less excess reserves. Bank will be compelled to reduce the proportion of loans they give to individuals and firms. The economy will experience a decrease in money supply.
c) The Council wishes to decrease the money supply. Describe precisely how this would work through the discount rate and effects on reserves.
If the council wishes to decrease money supply through

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