Explain thoroughly why credit cards are not technically money. Credit- card purchases really is just a pre-approved loan. Its only part of the transaction, since the merchant then goes to the bank that issued the credit card to get money. Then the banks sends you a bill which must be paid with money. When you use a credit card you do not provide spending power. You simply indicate that the issuing bank would make payment on your behalf in the future. In the long run you will have to pay it back.
Come up with an alternative money to currency. Remember, currency is cash. Do not use any of the other forms of money, such as checks, debit cards, etc. (Also, lease do not use precious metals or jewels). Justify your selection using the three characteristics of money. Will be using Walnuts for an alternative money to currency. Medium of Exchange – Medium of exchange means that walnuts will be widely accepted in exchange for goods and services. It stimulates and increases trade by providing an easy method of exchange. Since Walnuts are small and portable, walnuts will be an effective medium of exchange.
Store of Value – Means that walnuts has the ability to hold value over time. This makes walnuts a useful mechanism for transforming income in the present into future purchases. Standard of Value – This function of walnuts provides a common measurement of the relative value of goods and services. Without walnuts how would governments collect taxes?
Under what circumstances might the Fed want to shrink (contract) the money supply? Be sure to relate your answer to the resulting effect on the Aggregate Demand/Aggregate Supply model. The main reason why the Fed wants to shrink the money supply is to achieve their policy goals. They simply want to alter the money supply. This is achieved through raising the federal discount rate, reducing the monetary base through open market operations, and increasing serve requirements. The Fed is likely to decrease the money supply during times of high output and high inflation. The reason is that this gives the Fed opportunity to keep inflation in check without doing much harm to output.
Problem 5 Assuming the Fed chooses to shrink the money supply, explain how each of the three tools would be used. If the fed chooses to shrink the money supply the open-market sale of bonds to the public will take bank reserves out of the system, which would result in a decline in deposits and hence a decline in the money supply. Now if the fed reduces its lending to banks at the discount Indo, again bank reserves will fall and deposits will fall will also result in a decline in the money supply.
Finally, raising legal reserve requirements does not reduce bank reserves, however by raising the reserve/deposit ratio this action reduces the amount of deposits that banks can hold, this will result in deposits and the money supply declining. Problem 6 Explain as thoroughly as you are able, the mechanism that causes a shrinking money supply to result in a change in interest rates. A shrinking money supply is caused by a disequilibrium in the money market, where money demand is greater than money supply. As spending decreases, less money will be seen flowing throughout the economy.
So we have a decrease in the money supply. This is referred to the market mechanism, which will change in the interest rates. The interest rates will increase to reflect the market mechanism of creating a greater incentive for consumers to by assets. This will intern lead to the money demand decreasing to match the lower money supply.