Question B1.

a) Yes, Alipay can be treated as money. It is a digital platform to give effect to day to day
transactions. It can be called digital money. It satisfies the functions of money as follows:
1. Medium of Exchange: It acts as medium of exchange as you can transfer money
from Alipay to the other user. Also you can receive money from the same platform.
It is linked to bank accounts which allows you to transfer money in exchange of
goods.
2. Measure of value: Money's function is to act as a measure of value i.e. a common
denomination to measure value of goods. It also helps to use money in the form of
digital transfers as a common denomination. In other words, it involves money in
return of your purchase so a common denomination i.e. money is used through this
app.
3. Standard of Deferred Payment: You can use Alipay to transfer money for goods in
future as well.
4. Store of value: Alipay acts as a store of value i.e. you can keep your money saved
in a digital wallet to use it as and when required.
b)
i) Deposits = $28,200
Total Reserves = $4230
Total reserves = required reserves + excess reserves
4230 = Required Reserves + 564
4230 - 564 = required reserves
Required Reserves = 3666
Required reserves = required reserve ratio   deposits
3666 = RR ratio   28200
3666 / 28200 = RR ratio
Required reserve ratio = 0.13  100    (multiply with 100 to convert in %)
Required reserve ratio = 13%
Money supply (M1) = Cash + Demand deposits (C+DD)
M1 = 688 + 28200
M1 = $28,888 MILLION
ii)

   ASSETS    LIABILITIES

$(MILLION) $(MILLION)

required reserves 4,360 deposits 27,250

excess reserves 545

loans 22,345

TOTAL 27250 TOTAL 27,250

W
orking:
 New deposits = 28,200 - 950 = 27,250 (because $950 million is withdrawn, the
deposits will decrease)

Required reserve ration (new) = 13% + 3% = 16%

required reserves = 16 (27250)/100 = 4360
Total reserves earlier were 4230 i.e. 15% of 28,200. There is 2 % excess reserve.
New excess reserve = 2(27250)/100 =545
Loans to be given = 100 - 16 = 27,250 - (4360 + 545) = 22,345

c) With the increase in the reserve ratio, the Central Bank follows Contractionary Monetary
Policy. It will decrease the money supply because with the increase in the required
reserve ratio, there will be more amount kept as reserves with banks and it won’t be used
for giving loans. It means there will be less money available to give loans to the public.
This will decrease the money flow in the economy.

Question B2

a)
i) Using Expenditure method,

GDP ($ Million) = Private consumption + Net domestic fixed capital + Change in

inventories + Government expenditure + Total Exports of goods - Re-export of
goods + Export of services - Import of goods - Import of services

= 500 + 250 + 30 + 100 + 800 - 200 + 300 - 900 – 150

= 730

ii) Since actual GDP is less than potential GDP, there is a negative output
(recessionary) gap and economy is in recession stage.

Recessionary gap ($ Million) = 1010 – 730

= 280

iii) Government spending increases by $10,000 and imports increase by $200,000.

Decrease in GDP = 200,000 - 10,000 = $190,000

b) Labor force (LF) = Employed + Unemployed = 180 + 20 = 200

Working age population (WP) = LF + Not in labor force = 200 + 50 = 250

LFPR = LF / WP = 200/250 = 0.8 = 80%