Short Answer Questions (answer in the space provided below): 1.For the following

Question

Short Answer Questions (answer in the space provided below): 1.For the following statements, state Agree or Disagree. And provide brief explanations More than a half of the money issued by the government is actually held by people in foreign countries. Australia is hence less than half as wealthy as government statistics indicate'. (1 mark) a) b) Assets are things of value people own. Liabilities are debts. Hence, a bank will always consider a deposit in the account as an asset and a car loan as liability. (1 mark) c) Suppose that Jim buys bonds from a firm and both the firm and Jim expect a 2 per cent inflation rate for the year. Given this expectation, suppose that the nominal interest rate on the bonds is 6 per cent after Jim buys the bonds the inflation rate turns out to be 6 per cent, rather than the 2 per cent that had been expected. The firm gains from this unexpectedly high inflation rate and Jim loses out. (1 mark) (Answers)

Explanation / Answer

1. A) Disagree.

Money issued by the Government is not the wealth of the country. Money is currency plus checking deposits. Wealth is the value of assets minus debts.

B) Disagree

The balance in a checking account represents something the bank owes to the owner of the account . Therefore , it is a liability to the bank , although it is an asset to the owner of the account but for bank it is a liability. And the car loan is the asset of the bank as the loan amount is something account holder owes to the bank.

C) Agree

If inflation turns out to be 6%, the real interest rate is 6% minus 6% equals 0%, which is less than the 4% that was expected.
Because the real interest rate is lower than was expected, the Jim loses and the firm gains. The firm is paying the interest with dollars that are worth less than was expected.

2.

a. This is an example of the effect of shoe - leather costs, a net cost of inflation to the economy. Nobu spend valuable resources going to the bank more frequently and banks spend more resources in processing the greater volume of transactions.
b. This is an example of unit-of-account costs. A dollar when Nobu spends it on a work - related expense is worth more than a dollar he receives much later in reimbursement from his company. Because he is less willing to travel for her job, there is a net cost to the economy of him forgone output.

C. This is an example of menu costs, a net cost of inflation to the economy. The manager of Sofitel Hotel must reprint and resend an expensive brochure because it is necessary to raise the price of rentals due to unexpectedly high inflation.

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