Chapter 8 money, price level and inflation

ECO 101

TUTORIAL 6

1. What makes something money? What functions does money perform? Why do you think packs of chewing gum don't serve as money?

2. Why are cheques and credit cards not money?

3. What is the payments system?

4. How do banks create money?

5. How is money market equilibrium determined in the short run and in the long run?

6. You are given the following information about the economy of Nocoin: The banks have deposits of $300 billion. Their reserves are $15 billion, two thirds of which is in deposits with the central bank. Households and firms hold $30 billion in bank notes. There are no coins! Calculate:

a. The monetary base.

b. The quantity of money.

c. The banks' reserve ratio (as a percentage).

d. The currency drain ratio (as a percentage).

7. In Country A, the quantity theory of money operates. The country has a constant population, capital stock, and technology. In year 1, real GDP was $400 million, the price level was 200, and the velocity of circulation was 20. In year 2, the quantity of money was 20 percent higher than in year 1. What was

a. The quantity of money in year 1?

b. The quantity of money in year 2?

c. The price level in year 2?

d. The level of real GDP in year 2?

e. The velocity of circulation in year 2?