Current Economic Analysis - Week 7 Personal Assignment

This article discusses the intrinsic value of money, fractional reserve banking, M1 money supply, and the impact of Federal Reserve intervention on aggregate demand and equilibrium prices and output.

CURRENT ECONOMIC ANALYSIS
WEEK 7- Personal Assignment
STUDENT ID:
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Problem 1
The money that is used in the form of notes and coins does not have any intrinsic value.
However, despite this money is accepted by people with regards to goods and services
exchange because it is quite easy to convert money into various products and services. Since,
the various goods and services tend to have a monetary value attached, hence instead of
bartering these items and services, it is more convenient to use money as the preferred
exchange medium. Also, with the use of money the convertibility of this into goods &
services and vice versa is quite convenient (Mankiw, 2014).
Problem 2
Some people may be bothered by the fact that banks only keep a small fraction of their
account balance at a time. However, till the time, people are able to make transactions based
on their account balances money, the situation would not be categorised as worrisome. If
there is a run of the bank and every customer would intend to withdraw their money at a
given point of time, then the available reserves with the bank would not be sufficient of meet
the requirements of all the customers. As a result, there would be a collapse of the bank
followed by closure of business (Krugman & Wells, 2014). It is highly unlikely that the
customers would all want to withdraw the money simultaneously at a given time. This is
because not only the banks tend to keep the cash of the customers safe but also provide
incremental incentive n the form of interest payment (Koutsoyiannis, 2013).
Problem 3
One of the components of M1 money supply is M0 which refers to the currency in
circulation. Assuming the bitcoins is a form of currency which can be readily converted into
money through various exchanges and other means, increasing the value of bitcoin from $
250 to $ 500 would lead to an increase in the M1 by the same amount i.e. (500-250) or $ 250
(McConnell, Brue & Flynn, 2014).
Problem 4
a) It is known that on account of intervention from the Federal Reserve, there has been an
increase in the aggregate demand by 20 units which implies that a rightward shift would be
observed in the AD curve while the AS curve would remain constant. This is highlighted as
shown below (Mankiw, 2014).

It is apparent that the new equilibrium is at E2 while the previous equilibrium was at E1. For
the new equilibrium position, the price level and output level are both higher.
b) The impact on equilibrium prices and output under different scenarios (i.e. different AS
curve) is summarised below.
(i) AS curve is horizontal
Based on the above diagram, it is apparent that the increase in aggregate demand would lead
to increase in the output only while the price would continue to remain the same as the
suppliers are willing to provide any amount of output for the same price (Krugman & Wells,
2014).
(ii) AS curve is vertical
Based on the above diagram, it is apparent that the increase in
aggregate demand would lead to increase in the price only while

the quantity would continue to remain the same as the suppliers are not willing to provide
more output for any price (Koutsoyiannis, 2013).
(iii) AS curve is upward sloping
Based on the above diagram, it is apparent that the increase in aggregate demand would lead
to increase in the price level and output both as is apparent from the comparison of E2 and E1
i.e. the two equilibrium points (McConnell, Brue & Flynn, 2014).

References
Koutsoyiannis, A. (2013) Modern Macroeconomics. 4th ed. London: Palgrave McMillan.
Krugman, P. & Wells, R. (2014) Macroeconomics. 3rd ed. London: Worth Publishers.
Mankiw, G. (2014) Principles of Macroeconomics 6th ed. London: Cengage Learning.
McConnell, C., Brue, S. & Flynn, S. (2014) Macroeconomics: Principles, Problems, &
Policies. 20th ed. New York: McGraw Hill Publications.