What Distinguishes Money from Other Assets in the Economy Essay

2123 Words Mar 24th, 2012 9 Pages
Macroeconomics Assignment 4 – Lessons 7& 8
Solutions

1. What distinguishes money from other assets in the economy? (2 Mark)

ANS:

Money is different from other assets in the economy because it is the most liquid asset available. Other assets vary widely in their liquidity.

2. What are demand deposits, and why should they be included in the stock of money? (2 Mark)

ANS:

Demand deposits are balances in bank accounts that depositors can assess on demand simply by writing a cheque or by using a debit card. They should included in the stock of money because they can be used to buy goods and services.

3. If there was no item in the economy widely accepted in return for goods and services, how would
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11. Suppose that the Bank of Canada sells 100 million pounds sterling from its foreign exchange reserves, and that the exchange rate is $2.40 Canadian per pound sterling.
(i) Explain what happens to the Canadian money supply. (5 Marks)
(ii) Now suppose that the Bank of Canada does not want the money supply to change. What would it need to do to sterilize its foreign exchange market operation?

ANS:

(i) The Canadian money supply will shrink because it is withdrawing Canadian money from circulation.

(ii) In order for the money supply to remain constant, the Bank of Canada would need to engage in open-market operations by purchasing $240 million of government bonds.

12. What is the maximum amount that the money supply can increase when $1,000 cash is injected into a banking system with a 20-percent reserve requirement? Give two reasons why this maximum may not be reached. (5 Marks)

ANS:

A 20 per cent reserve requirement equals a money multiplier of 5

✓ The money multiplier would be the reciprocal of the reserve ratio:

Money Multiplier = 1/R =1/.20 = 5 ✓ Therefore the maximum amount the money can increase

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