1.
a. According to Peter Heather, a historian at the University of Oxford; during the
Roman Empire the German tribes east of the Rhine River produced no coins
of their own but used Roman coins instead:
Although no coinage was produced in Germania, Roman coins were in plentiful
circulation and could easily have provided a medium of exchange (already in
the first century, Tacitus tells us, Germans of the Rhine region were using goodquality Roman silver coins for this purpose).(Heather, 2006)v
i. What is a ‘medium of exchange’?
ii. What does the author mean when he writes that Roman coins could have
provided the German tribes with a medium of exchange?
iii. Why would any member of a German tribe have been willing to accept a
Roman coin from another member of the tribe in exchange for goods or
services when the tribes were not part of the Roman Empire and were
not governed by Roman law?
b. On 1 January 2002, Germany officially adopted the euro as its currency, and
the deutsche mark stopped being legal tender. However, even a decade later,
many Germans were still using the deutsche mark to make purchases, with
many stores in Germany continuing to accept it. Briefly explain how it is
possible for people to continue to use a currency when the government that
issued it has replaced it with another currency.
2.
a. What is the main difference between the M1 and broader definitions of the
money supply?
b. Briefly explain whether each of the following is counted in M1.
i. The coins in your pocket
ii. The funds in your building society demand deposit account
iii. The funds in your bank demand deposit account
iv. Your MasterCard credit card limit
c. Suppose you decide to withdraw $100 in currency from your bank demand
deposit account. What is the effect on M1? Ignore any actions the bank may
take as a result of your having withdrawn the $100. Is measuring income a
way of measuring wealth?
14
- Suppose you deposit $2000 in currency into your cheque account at a branch
of the Commonwealth Bank, which we will assume has no excess reserves
at the time you make your deposit. Also assume that the bank maintains a
reserve ratio of 0.2, or 20 per cent.
a Use a T-account to show the initial impact of this transaction on the
Commonwealth Bank’s balance sheet.
b Suppose that the Commonwealth Bank makes the maximum loan they
can from the funds you deposited. Using a T-account, show the initial
impact of granting the loan on the bank’s balance sheet. Also include on
this T-account the transaction from (a).
c Now suppose that whoever took out the loan in (b) writes a cheque for this
amount and that the person receiving the cheque deposits it in a branch
of the Westpac bank. Show the effect of these transactions on the balance
sheets of the Commonwealth Bank and Westpac bank, after the cheque
has been cleared. (On the T-account for the Commonwealth Bank, include
the transactions from (a) and (b).)
d What is the maximum increase in cheque account deposits that can result
from your $2000 deposit? What is the maximum increase in the money
supply? Explain.
4
a. What are the main roles of the Reserve Bank of Australia (RBA)? How does
the RBA control liquidity in the overnight money market?
b. Explain briefly why an open market purchase of government securities by the
RBA increase bank reserve and why an open market sale of government
securities by the RBA decrease bank reserves?
5
a. Explain why the RBA is targeting inflation in Australia. Explain the most frequent
reason why the RBA uses open market operations in Australia.
b. What is the quantity theory of money? How does the quantity theory explain
why inflation occurs? According to the quantity theory of money, if the money
supply is growing at a rate of 6 per cent per year, the economic growth rate is
3 per cent per year and velocity is constant, what will the inflation rate be? If
velocity is increasing at 1 per cent per year instead of remaining constant, what
will the inflation rate be?
Sample Solution
