Money, Banks and the RBA
Money, Banks and the RBA Chapter 11
Above is a plot of the price of bitcoin in US dollars. Since the beginning of 2012 its price has been as low as US$4.62 and as high as US$1,147.25 (for reference, the price of an Australian dollar over this period fluctuated between US$0.75 and US$1.08).
(a) Describe the functions of money
(b) For each function of money, give an example of an economic activity which would be impossible or very difficult to conduct without money performing that function. Briefly explain your examples.
(c) Do you think Bitcoin performs each of the functions of money well? (Hint: the graph above and a few minutes of internet research should give you enough of an idea to write a few sentences for each function.)
“Inflation is always and everywhere a monetary phenomenon”
– Milton Friedman
a) What is the quantity theory of money? Refer to the equation of exchange to answer this question.
b) If nominal GDP grows at 5% per year and real GDP grows at 3% per year, what growth rate of the money supply is consistent with the quantity theory of money?
c) In August 2008, the Zimbabwean Dollar had banknotes of denominated in $1, $5, $10, $20, $100, $500 and $1000. By January 2009, it was deemed necessary to print a $100 000 000 000 000 note (shown below). What do you think happened between 2008 and 2009 to make this necessary?
Suppose Jane deposited a $100 note (ie currency) into her deposit account with ANZ bank.
a) Show this deposit on a T-account for ANZ bank
b) If ANZ’s reserve ratio is 0.1, how much extra can the bank now lend?
c) Show on ANZ’s T-account the bank lending this amount to Leo (assume Leo immediately withdraws the loan as currency)
d) Suppose Leo spends all of this cash getting a massage from John and John deposits all of this currency into his account with the ANZ bank. Show this deposit on a T-account for ANZ bank
e) How much extra can the bank now lend?
f) Show on ANZ’s T-account the bank lending this amount to Sara (assume Sara immediately withdraws the loan as cash)
g) How much in total deposits will be created by Jane’s deposit of $100 in cash?
h) How much will the money supply change as a result of Jane’s deposit of $100 in currency? (Carefully think about the different parts of the money supply and how they change)
Below is the balance sheet for Lowman Brothers Bank
Lowman Brothers Bank 2013
Assets (millions of $) Liabilities and Equity (millions of $)
Reserves 20 Deposits 340
Securities 20 Equity
Total Assets 540 Total Liabilities & Equity
a) What does each of the items on the balance sheet describe?
b) Fill in the values for “Equity” and “Total Liabilities and Equity”
c) Update the balance sheet to show Lowman Brothers accepting that half of the total value of their loans will not be repaid
d) After the events in part c) how would you describe the bank’s situation?
e) If no action is taken, what will the result be for the bank and its depositors?
f) Can this situation be rectified by the bank and its depositors and creditors alone? What is this kind of solution called? Describe such a solution in the case of Lowman Brothers Bank and update the balance sheet from your answer in part (a). Why would depositors agree to such a plan?
g) Can this situation be rectified by the government or an outside investor? What is this solution called? Describe such a solution in the case of Lowman Brothers Bank and update the balance sheet from your answer in part (a). Why would investors or the government agree to such a plan?