To receive full credit for each question, your answers must be at minimum 15 sen
ID: 1195171 • Letter: T
Question
To receive full credit for each question, your answers must be at minimum 15 sentences long, it must answer every part of the question, it must include economic concepts that were taught in class and where necessary provide real world examples and empirical data. You must also explain your conclusions.
Question — Money
“The United States can pay any debt is has because we can always print money to do that. So there is zero probability to default” (Greenspan)
“It’s not tax money. The banks have accounts with the Fed much the same way that you have an account in a commercial bank. So to lend to a bank we simply use the computer to mark up the size of the account that they have with the Fed” (Bernanke)
Explain in detail the two views towards money. What does scarcity have to do with ideas of money if any?
When economists talk about the Money Supply, what exactly are they referring to? That is, what components make up the Money Supply? Does an increase in reserves in the banking system lead to inflation? Explain why or why not. Which institution creates the majority of the Money Supply, the government or the banks? In the balance sheets of the Federal Reserve, Commercial Banks & Thrifts and HHs & Firms whose assets are whose liabilities? What does looking at a balance sheet tell us about the definition of money?
If the federal government does not “need” your money to spend, why is it taxing you? What does this tell us about the reason why we accept U.S. currency as a means of exchange?
Because GDP = NI, we get the equation 0 = (I-S) + (G-T) + (X-M). This equation is reflected in the graph below. What do the equation and the graph tell us about the relationship between government deficit and private sector surplus? Why is the graph a mirror image? If you own government securities, is this a debt or a credit from your perspective?
Why would Hamilton say, “anything that is technologically feasible is financially possible” (1987)? What are society’s real constraints? What solutions are available to us to remedy some of these problems?
When you pose the answer please pose the question together, and put the answer right after that question, Thank you very much!
Explanation / Answer
Explain in detail the two views towards money. What does scarcity have to do with ideas of money if any?
Answer: Out of two views, second view is correct. Money is like a coupon. If we have money and we have no goods and services in the economy, money will just create inflation. Imagine a canteen where noodles are given for coupons. If two coupons are issued for two plates of noodles then one plate can be obtained by giving one coupon but if we issue 10 coupons on 2 plates of noodles then one plate of noodles can be obtained in five coupons. Similarly, printing money is not the solution to any problem unless it is accompanied by corresponding increase in production fo goods and services.
Scarcity is important in terms of money because money must be as scarce as goods and services are otherwise it will lose its value and a currency paper will be equivalent to a common piece of paper. This is the reason $1 = Rs. 60 or dinar 50 etc.
When economists talk about the Money Supply, what exactly are they referring to? That is, what components make up the Money Supply?
The money supply is commonly defined to be a group of safe assets that households and businesses can use to make payments or to hold as short-term investments. For example, U.S. currency and balances held in checking accounts and savings accounts are included in many measures of the money supply.
There are several standard measures of the money supply, including the monetary base, M1, and M2. The monetary base is defined as the sum of currency in circulation and reserve balances (deposits held by banks and other depository institutions in their accounts at the Federal Reserve). M1 is defined as the sum of currency held by the public and transaction deposits at depository institutions (which are financial institutions that obtain their funds mainly through deposits from the public, such as commercial banks, savings and loan associations, savings banks, and credit unions). M2 is defined as M1 plus savings deposits, small-denomination time deposits (those issued in amounts of less than $100,000), and retail money market mutual fund shares.
Does an increase in reserves in the banking system lead to inflation? Explain why or why not.
No, It does not increase inflation because when there is increase in reserves, banks credit creation capacity reduces. Credit creation capacity of banks = Money multiplier = 1/LRR. More is the LRR, less will be credit creation capacity of banks and vice verca. therefore, when there is an increase in reserves in the banking system it leads to inflation.
Which institution creates the majority of the Money Supply, the government or the banks?
Banks
The quantity of money in any economy is determined by the monetary base, which are the banking reserves and currency held by the public. In other words, the monetary base consists of the actual quantity of money. However, because money also has velocity, in that the same dollar is used in multiple transactions over time, the monetary base is often called high-powered money because the total value of all financial transactions is a multiple of the monetary base.
But banks multiply this money by credit creation process.
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