BAFB1033

MACROECONOMICS
TOPIC 5
MONEY AND MONETARY POLICY

Name: Muhammad Syahmi Bin Anua

Matric number: mc 230521983

Question 1
a) What is the main problem with a barter system? Briefly explain and give an
appropriate example.

In barter system there was no accurate measurable rod, so

people used to get often in loss. And money helped in this
scenario as a exchange process, there were no ways of saving,
because an item can't be saved for a long time.

b) State the function of money for each statement below and explain your answer:

i) Before Ahmed buy a new car, he visits four local dealerships and collect
information on the prices and features of the cars.

Money functions as a unit of account, so in this case

Ahmad will not be able to pylut a price tag just based on
the worth and value instead money will help it to simplify
the process. So the decision of purchasing a car will
require more goods hence it's better to go less favourable.

ii) Ahmed has recently bought a new Samsung Galaxy Note II mobile phone.

Money also functions as a medium of exchange, this has

been possible for Ahmad to use the money for buying a
mobile phone. So he generated income in terms of
monetary means not in commodities. That is how he was
able to buy the goods.

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 iii) Ahmed keeps his money in the saving accounts, one of the banking facilities
offered by Maybank.

Money functions as a store value. If we have enough money

we can save it easily, at home or in bank, the safest is
bank because that form of money becomes easily available
later. Money can be also saved in other form like gold,
jewelry etc.

iv) Ahmed’s mother loaned him RM1,800 for him to buy a brand new Samsung
Galaxy Note IV mobile phone and promised to pay back his mother next month.

Money here functions as the standard of deferred payments. This is illustrated

when Ahmed took a loan of RM1800 from his mother in present times
(advanced) which he will then repay in the same form. To simply put it, Ahmed
purchased himself a new phone using money in advance of the time he will be
able to earn those money. Hence, we can say that these money here helps
Ahmed to deferred his payment for the phone.

Question 2
During World War II, cigarettes were used as money in prisoner of war camps. Considering
the attributes that good money should possess, why would cigarettes emerge as money
among prisoners?

As prisoner, all assets in monetary forms are seize. This makes cigarette (as money)
possesses more importance during war than plain money value. The use of cigarettes as
currency provided some stability and are able to cater to the its demand within the prisoner
of war camps. At those times, the number of cigarettes hold by one is the way to measures
one’s wealth in the prison as well.

Question 3
Suppose that all commercial banks in Arora have zero excess reserve, and the public must
keep their money in the bank. Fairytale Bank is one of the commercial banks in Arora.
Fairytale Bank receives a cash deposit of $570,000 by Mr. Mufasa who opens up a new
checking account. Assume that a required reserve ratio is 13 per cent.

Based on the information given:

a) Construct a balance sheet for Fairytale Bank.

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Require reserved $ 74,100
Loan $495,900
Total Assets $570,000
Demand deposit $570,000

How to compute for require reserve: $570,000 x 13% = $74,100

Loan is an asset that the bank can use earn interest
Demand deposit is a liability that the bank owes to depositor Mufasa.

b) If the whole amount of the excess reserve in the Fairytale Bank is lent out to Mrs. Puff,
who then deposited the money in the Lion King Bank, construct the balance sheet for
the Lion King Bank. [Assume that the Lion King Bank holds no initial deposits.]

Require reserve $ 64,467

Excess reserve $431,433
Total Assets $495,900
Demand Deposit $495,900

Lion King receives a deposit from Mrs. Puff amounting to $495,900 x 13% = $64,467
Excess reserve of $431,433 is taken up.
Demand deposit forms part of its liability to depositor Mrs. Puff.

c) Calculate the total deposits, total reserves and total loans created by this economy.

Total deposits $1,065,900

Total reserves $ 138,567
Total loans $ 495,900

Mr. Mufasa to Fairy-tale = $ 570,000

Mrs. Puff to Lion King = $ 495,900
Total deposits = $1,065,900

Fairy-tale = $ 74,100
Lion King = $ 64,467
Total reserves = $138,567
Loans (granted to Mrs. Puff only) = $495,900

Question 4
Why should the government opt for expansionary monetary policy during unemployment
and contractionary monetary policy during inflation?

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Governments and central banks believe a small level of inflation is
good because it spurs demand. If consumers believe that goods
and services will be more expensive in the future due to increased
prices, they will buy those goods and services in the present.
And of course, as per the law of supply and demand, the more they
buy, the more businesses must produce. That means businesses
need more workers, which means increased employment, which
means more disposable income to buy goods and services, which
further increases demand and prices.
The problem arises when there is too much demand in the present.
If businesses cannot produce more, or their production costs
increase too much, then they raise prices. Things start to cost
more than their intrinsic worth, and if prices get too high, it
eventually chokes off demand - because people can't afford to buy
anymore.
And if businesses over-expanded in an effort to keep up with
demand, they'll be in trouble when demand dries up.
The purpose of contractionary monetary policy is to prevent these
rude shocks from happening. To slow down economic growth, the
central bank must curb demand by making goods and services
more expensive to buy - at least for a while.

***End of Exercise Questions***