All Terrain Thinking

A Compendium of things I think are Important

Economics: It's not just whats' in your wallet

Questions of the Day
1970s: Money Supply Process

1. Let's talk about money. More specifically, let's talk about the history of money.

• When and where did we first see coins used as money? Why was this such an important development?
• When and where did we see first see paper money used?
• What is debasement of currency and what problem did it cause Nero, a Roman emperor in the first Century AD?

2. The island economy of Tundrania produces five goods using its only resource: labor. Below, these five goods are listed along with the amount of labor time embodied in the goods. Assume that any individual could produce each item if they so desired.

Auto	Food	Clothing	Shelter	Recreation
1,000	10	15	4,000	5

a. What is the price of an auto in this economy? Tell me all the information I need to know for transactions purposes (how many different trades are there)?

b. Develop a commodity money and describe the prices of all the goods produced in the economy.

c. Develop a fiat money and describe all the prices in the economy.

3. During financial crises people tend to prefer cash to checks so they often attempt to take cash out of banks. This is what happened during the Great Depression as banks collapsed and people withdrew their money and put it into their mattresses.  If they convert their checking accounts into cash, what will happen to the money supply?

4. Assume that your forecaster, a fairly reliable source, has informed you that the economy is expected to emerge from a long recession. Please use S&D to develop a forecast for interest rates.

5. What if we found ourselves in a situation where the FED did not want to see interest rates rise. Please describe to me how the FED could reverse the expected rise in rates and describe the three major tools that the FED could use to alter the money supply to achieve this goal.

6. Explain, in words, what happens when the Federal Reserve conducts an open-market sale of $100 million in bonds. What is the ultimate effect on high-powered money, the money supply and interest rates?

7. Determine with the aid of the MS-MD diagram the impact of the following on interest rates and the money supply.

• a. an expansion in the economy
• b. the public's desire to hold a greater share of money as currency
• c. the Fed's open-market purchases of government securities
• d. a decision on the part of banks to lower their excess reserves

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