Homework 3 2015

Homework 3 (based on chapters 29, 30) 1. Maria from Russia wins an American lottery and receives X million dollars. She deposits it in her bank account in Switzerland in the form of 10 million Swiss francs. Assume that all banks in Switzerland hold reserves equal to 5% of deposits. a) Graph the process of money creation using T-accounts for the First Swiss Bank (where Maria deposited her prize), the Second Swiss Bank, etc., (analogously to what you can see on pages 598, 599) b) By how much will the total amount of deposits in the Swiss banking system increase? c) Calculate the money multiplier. d) What will happen to Swiss banking system if Maria after several years withdraws her deposit and transfers it to Russia?

2.

In the extraterrestrial colony isolated from the rest of the universe (by accident) the entire economy uses 10 000 identical coins made of platinum, called (also by incident) €. a) If citizens hold all money as currency, what is the quantity of money? b) If citizens deposit all their coins in the banking system, and banks hold 100% as reserves, what is the quantity of money in the economy? c) If citizens hold all coins as demand deposits in the banking system, but banks hold only 2% as reserves, what is the total quantity of money?

3.

In Estonia the nominal money supply is €400 million, the nominal GDP is €1200 million. Assume that the price level is 2. a) Calculate the nominal GDP and the velocity of money circulation. b) Assume that the velocity is constant and the real GDP will grow by 5% next year. What will happen to the price level and the nominal GDP if the central bank keeps money supply constant? c) Assume that the velocity is constant and the real GDP will grow by 5% next year. What should the central bank do if it wants to have 0% inflation? d) What if it wants to have 5% inflation?

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