macroeconomics

Question 1. Functions, properties of money, and monetary regimes

In your opinion, in modern American society, bitcoin:

serves the following functions of money: doesn’t serve the functions below:

furthermore, bitcoin:

shares the properties of money below: doesn’t share the properties below:

Based on the lists you made, conclude whether bitcoin is or is not money

Note: if you are not comfortable discussing bitcoin, discuss gold in this question instead.

Question 2. Creation of money.

The monetary system begins with the Fed buying a batch of T-bills on the open market. The banks take the paper cash and give out the first round of loans: $373.5. Every bank in the country maintains a 17% reserve rate.

(a) What is the size of the monetary base in the economy?

(b) Borrowers in the country keep $112.05 in cash and deposit 261.45 on their checking accounts. Find the currency drain rate of the population.

(c) Now that one round of loans was made, find the monetary aggregates M0 and M1 in the economy.

(d) With the above MB, reserve rate and currency drain rate, what will the ultimate size of M0, deposits, and M1 be in the economy?

Question 3. The US Federal Reserve.

(a) Draw arrows to connect the Fed entities and their functions/features:

(b) Which of these people is the current chair of the Fed?

(c) If you were an employee of the Fed, how would you answer the popular question “where’s my bailout?”. Please be concise.

Question 4. Policy instruments

(a) The graph below shows the money market equilibria before and after the Fed’s policy intervention. You know that only one conventional policy instrument was used. Complete the graph and suggest which instrument it was.

(b) If the Fed is attempting to stimulate the economy with an expansionary monetary policy, what should it do with regard to each conventional policy tool (circle the right ones)? Note that some of the suggestions on the list are not even policy tools at all and should be ignored.

(c) Both the open market operations (OMO) and quantitative easing (QE) involve purchases of assets by the Fed in exchange for paper cash.

What assets are bought in each case?

Why was QE effective in the 2008 crisis, whereas OMO were not?

Hint: compare the risk of assets bought in OMO and QE.

Question 5. Equilibrium on the money market

The economy produces 15000 units of goods. Each good costs $8. Every dollar is spent three times a year on average.

(a) Find the money mass that would facilitate transactions and ensure price stability in this economy.

(b) One of the events during the financial crisis, “credit crunch”, involved banks frantically trying to round up as much cash as possible to increase resilience at the cost of profitability. What do you think happened to:

(c) Show how the shock from (b) would affect the LM curve in the figure below.

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