Problem set 1

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Problem set 1
Macroeconomía II
2017
Question 1 (Mankiw). What are the three functions of money? Which of the functions do the following items
satisfy? Which do they not satisfy?
1. A credit card;
2. A painting by Rembrandt;
3. A subway token.
Question 2 (Mankiw). An economy has a monetary base of 1,000 $1 bills. Calculate the money supply in
scenarios (a)-(d) and answer part (e).
(a) All money is held as currency.
(b) All money is held as demand deposits. Banks hold 100 percent of deposits as reserves.
(c) All money is held as demand deposits. Banks hold 20 percent of deposits as reserves.
(d) People hold equal amounts of currency and demand deposits. Banks hold 20 percent of deposits as reserves.
(e) The central bank decides to increase the money supply by 10 percent. In each of the above four scenarios,
how much should it increase the monetary base?
Question 3. Are the statements below true or false? If false, justify.
1. According to the Cagan’s model, the currenct price level depends on the current money and past money supply.
2. When the central bank buys bonds through a open market operation the monetary base increases.
3. According to the Baumol-Tobin model, the demand for money is only affected by the real interest rate, not
the nominal interest rate.
4. When someone deposits $100 in the bank, the monetary base is reduced.
5. According to the Baumol-Tobin model, a 10% increase in the interest rate causes a 5% increase in the demand
for money.
6. According to the Baumol-Tobin model, the higher the cost of going to the bank, the higher the elasticity of
the money demand with respect to income.
Question 4 (Mankiw). To increase tax revenue, the U.S. government in 1932 imposed a 2-cent tax on checks
written on bank account deposits. (In today’s dollars, this tax would amount to about 34 cents per check.)
(a) How do you think the check tax affected the currency-deposit ratio? Explain.
(b) Use the model of the money supply under fractional-reserve banking to discuss how this tax affected the
money supply.
(c) Many economists believe that a falling in the money supply was in part responsible for the severity of the
Great Depression of the 1930s. From this perspective, was the check tax a good policy to implement in the middle
of the Great Depression?
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