Exercise Set 3

Macroeconomics
Tatiana Monserrat Penella

Questions for Review p.336 Ex6

6. Why don’t banks hold 100 percent reserves? How is the amount of
reserves banks hold related to the amount of money the banking system
creates?

Banks don´t hold a 100 percent reserves because they don´t control the amount of money
that households choose to hold as deposits in banks. The more money households deposit
the more money the banking system can great. The fraction of total deposits that a bank
holds as reserves is called the reserve ratio. This ratio is determined by a combination of
government regulation and bank policy. As we discuss more fully later in the chapter, the
Fed places a minimum on the amount of reserves that banks hold, called a reserve
requirement. In addition, banks may hold reserves above the legal minimum, called excess
reserves, so they can be more confident that they will not run short of cash. For our purpose
here, we just take reserve ratio as given and examine what fractional-reserve banking
means for the money supply.
The purpose of the bank is to give depositors a safe place to keep their money. Whenever a
person deposits some money, the bank keeps the money in its vault until the depositor
comes to withdraw it or writes a check against his or her balance. Deposits that banks have
received but have not loaned out are called reserves. In this imaginary economy, all
deposits are held as reserves, so this system is called 100-percent-reserve banking.
When banks loan out some of their deposits, they increase the quantity of money in the
economy. Because of this role of banks in determining the money supply, the Fed’s control
of the money supply is imperfect.

Problems and Applications p.337, Ex7

7. You take $100 you had kept under your pillow and deposit it in your
bank account. If this $100 stays in the banking system as reserves and if
banks hold reserves equal to 10 percent of deposits, by how much does the
total amount of deposits in the banking system increase? By how much
does the money supply increase?

Read Class6.pdf and answer the following questions:

Questions for Review p.237 Ex1

1. Which do you think has a greater effect on the consumer
price index: a 10 percent increase in the price of chicken
or a 10 percent increase in the price of caviar? Why?
In my opinion it would create a greater effect on the consumer the increase of the 10
percent in the price of the chicken that in the increase of the price of caviar. Because the
consumption of chicken in much higher than the consumption of caviar; chicken in a
product that society eat day a day. So the cause of this is that the government has create a
aggregate demand and aggregate supply in this products the problem is that increasing the
price of chicken the sales of this product are going to go down because the society would
buy other products that haven´t increase the price a 10 percent. If we increase the price
level and the investment the interest rate would be affected and if the consumption
decreases the wealth effect would decrease also this we will see it in the aggregate demand
curve and this affects: consumption, investment, government purchase, net exports. So we
will have a long run growth and inflation. Short run functions in output and price level
should be viewed as deviations from continuing long run trends. In the short run an increase
in the overall level of prices in the economy tends to raise the quantity of goods and
services. In the short run increases in the overall level of the prices in the economy tends to
raise the quantity of goods and services supplied.

Problems and Applications p.237 Ex2

2. Suppose that the residents of Vegopia spend all of their

income on cauliflower, broccoli, and carrots. In 2001 they buy 100 heads of
cauliflower for $200, 50 bunches of broccoli for $75, and 500 carrots for $50.
In 2002 they buy 75 heads of cauliflower for $225, 80 bunches of broccoli for
$120, and 500 carrots for $100. If the base
year is 2001, what is the CPI in both years? What is the inflation rate in 2002?