Econ reading Assignment Example | Topics and Well Written Essays - 750 words

Econ reading - Assignment exercisingOn the contrary, Fiat bullion is the one that does not birth intrinsic encourage. Fiat property whitethorn be utilized upon government decree. On the other hand, demand deposits are account balances in a assert that depositors may obtain via writing a check upon request. Therefore, demand deposits should be included in the stock cash in order to measure the nourish of property in the stock (Mankiw, 2011). The U.S federal official Reserve System acts as a central bank, it sets financial policies in an economy. The Federal group is positive by the president upon senate approval. Fed can increase the tot money in circulation through blossom forth market opeproportionn, whereby, Fed can make dollars and utilize them to buy bonds this led to an increase the amount of money in circulation (Mankiw, 2011). On the contrary, banks do not hold 100 takes because they lend some money to earn profits. The relationship between amount of reserves and amount of money in the banking system a rises because banks accepts deposits from the public and lend out some deposits while ensuring proportion bank reserve is maintained (Mankiw, 2011). If bank A has a leverage ratio of 10, while Bank B has a leverage ratio of 20 whereby, similar losses on bank loans at the two banks cause the value of their assets to root by 7 percent. The above statement indicates that bank B showed a larger change in bank capital than bank A because its capital value declined twice as much as bank A. However, the two banks remained solvent because they can be able to meet their financial obligation. Connectively, discount vagabond is an interest rate charged by Fed to moneymaking(prenominal) banks when advancing loans, when Fed raises discount rates, the amount of money in circulation decreases (Mankiw, 2011). Discount rate is the interest rate charged by Fed to commercial bank on borrowed funds, when Fed raises the discount rates, bank reserve decrease th is in turn causes the cost of borrowing to increase. This discourages borrowing and consequently reduces the amount of money in circulation (Mankiw, 2011). . On the other hand, a reserve requirement is the amount of funds that a bank should retain after advancing loans. Whereby, an increase in reserve requirement causes an increase in reserve ratio, this in turn leads to a decrease in money supply. Additionally, Fed can not perfectly control the supply money because it does not have control of the amount of money held in the pockets of households. Secondly, Fed does not have control of the amount of money advanced as loans by the banks (Mankiw, 2011). 2.) Answer Questions for Review 1 in the middle of page 666 The value of money may be affected through increasing price level. This is because the money tends to lose its value this further reduces the purchasing power of money. consort to the quantity theory of money, an increase in quantity of money leads to an increase in largene ss rates. In above connection, nominal variables are those measured in monetary terms while real variables are those that can be measured in physical terms. According to the principle of monetary neutrality, nominal variables may be affected by changes in quantity of money. fanfare is like a tax in the senses that when government print money, the amount of money held by population losses value due to increase in money supply (Mankiw, 2011). According to Fishers effect, an increase in lump rate causes real interest to fall. On the hand, nominal interest rate increases. The cost of inflation may involve menu cost that causes the company to adjust its prices such cost of printing brand-new catalogues, advertising to mention just but a few. The most important cost for the U.S economy is inflation cost because an increase the tax burden