Economics

Michael Parkin, Melanie Powell, Kent Matthews

Chapter 26

Money, Banks and Interest Rate - all with Video Answers

Educators

Chapter Questions

Problem 1

Which of the following items are money?
a Bank of England notes in the commercial banks' cash machines.
b Your Visa card.
c The coins inside public phones.
d Pound coins in your wallet.
e The cheque you have just written to pay for your rent.
The student loan you took out in September to pay for your tuition fees.

KM

Kanishk Mishra

Numerade Educator

Problem 2

Which of the following items are money? Which are deposit money?
a Deposits at the Bank of England.
b British Telecom shares held by individuals.
c The $£ 5$ commemorative crown for the Queen's Jubilee.
d UK Government securities.

Pragya Ahuja

Numerade Educator

Problem 3

Sara withdraws $£ 1,000$ from her savings account at her building society, keeps $\mathrm{t} 50$ in cash, and deposits the balance in her chequable account at her commercial bank. What is the immediate change in currency and in M4?

KM

Kanishk Mishra

Numerade Educator

Problem 4

Monica takes $€ 10,000$ from her account at a commercial bank in Spain and puts the funds into her building society account in the United Kingdom. What changes occur in Eurozone $\mathrm{M} 3$ and UK $\mathrm{M} 4 ?$

KM

Kanishk Mishra

Numerade Educator

Problem 5

The banks in Zap have:
Reserves f250 million
Loans
$f^{\prime} 1,000$ million
Deposits
$£ 2,000$ million
Total assets
E2 $, 500$ million
a Construct the banks' balance sheet. If you are missing any assets, call them "other assets'; if you are missing any liabilities, call them "other liabilities'.
b Calculate the banks' reserve ratio.
C If banks hold no excess reserves, calculate the deposit multiplier.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 6

The banks in Zip have:
Reserves $\quad$ f 125 million
Loans
$€ 1,875$ million
Deposits $\mathrm{f} 2,000 \mathrm{million}$
Total assets $\quad \mathrm{E} 2,100 \mathrm{million}$
a Construct the banks' balance sheet. If you are missing any assets, call them 'other assets'; if you are missing any liabilities, call them 'other liabilities'.
b Calculate the banks' reserve ratio.
G If banks hold no excess reserves, calculate the deposit multiplier.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 7

The spreadsheet figure provides information about the demand for money and supply of it in Minland. Column A is the interest rate, $R$. Columns $B$, $C$, and $D$ show the quantity of money demanded at three different levels of real GDP: $Y_{0}$ is $£ 10$ billion, $Y_{1}$ is $£ 20$ billion, and $Y_{2}$ is $£ 30$ billion. Column $E$ shows the supply of money. Initially, real GDP is $£ 20$ billion.
Draw a graph to show the demand for money, supply of money and money market equilibrium in Minland and explain what happens in Minland if the interest rate:
a Exceeds 4 per cent a year?
b Is less than 4 per cent a year?
c Equals 4 per cent a year?

KM

Kanishk Mishra

Numerade Educator

Problem 8

In problem $7,$ Minland experiences a severe recession. Real GDP falls to $£ 10$ billion.
a What happens in Minland if the interest rate is 4 per cent a year?
b What is the equilibrium interest rate?
c Compared with the situation in problem 7 , does the interest rate in Minland rise or fall? Why?

KM

Kanishk Mishra

Numerade Educator

Problem 9

In problem $7,$ Minland experiences a strong expansion. Real GDP rises to $£ 30$ billion. Then a recession hits and real GDP falls to $£ 10$ billion. What happens to the interest rate in Minland during the:
a Expansion phase of the cycle?
b Recession phase of the cycle?

KM

Kanishk Mishra

Numerade Educator

Problem 10

In problem $7,$ a financial innovation changes the demand for money. People plan to hold $£ 0.5$ billion less than the numbers in the spreadsheet.
a What happens to the interest rate?
b What happens to the interest rate if at the same time as the change in the demand for money, the supply of money decreases by $€ 0.5$ billion? Explain.

KM

Kanishk Mishra

Numerade Educator

Problem 11

In problem $7,$ Real GDP in Minland is $£ 20$ billion. The supply of money increases by $£ 1$ billion above the numbers shown in the spreadsheet.
a What happens in Minland if the interest rate is 4 per cent a year?
b What is the equilibrium interest rate?
c Compared with the situation in problem $7,$ does the interest rate in Minland rise or fall? Why?

KM

Kanishk Mishra

Numerade Educator

Problem 12

In problem $7,$ Real GDP in Minland is $£ 20$ billion. The supply of money decreases by $€ 1$ billion above the numbers shown in the spreadsheet.
a What happens in Minland if the interest rate is 4 per cent a year?
b What is the equilibrium interest rate?
c Compared with the situation in problem $7,$ does the interest rate in Minland rise or fall? Why?

KM

Kanishk Mishra

Numerade Educator

Problem 13

3 In Minland in problem $7,$ a new smart card replaces currency and the demand for money changes. Also, the new smart card causes business to boom and real GDP increases.
a Modify the numbers in the spreadsheet by making up your own numbers that are consistent with the events just described.
b Draw the demand for money curve and supply of money curve that describe the initial situation and the situation based on your numbers.
c What would have to happen to the supply of money in Minland if the interest rate was to remain constant through these events?

Alex Loukas

Numerade Educator

Problem 14

In Minland in problem $7,$ a financial crisis occurs. The people begin to distrust the banks and withdraw their deposits. At the same time, they cut up their smart cards and start using currency again. The financial crisis brings a deep recession.
a Modify the numbers in the spreadsheet by making up your own numbers that are consistent with the events just described.
b Draw the demand for money curve and supply of money curve that describe the initial situation and the situation based on your numbers.
c What would have to happen to the supply of money in Minland if the interest rate was to remain constant through these events?

Alex Loukas

Numerade Educator