Money is any commodity that can be used easily to purchase a good or service, which...

      

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Money is any commodity that can be used easily to purchase a good or service, which makes its principle function a means of exchange. However, it is important to recognize that money is also used as a unit of account for comparing the value of diverse goods and services as well as a store of value. There are three broad measures of the quantity of money: MO or MB, which is the most liquid monetary base containing circulating cash and coin as well as bank reserves; M1, which includes demand deposits and savings accounts, and M2, which includes time deposit accounts and other less liquid securities. It is important to remember that as money increases in liquidity, from M2 to MO, the total value of M2 does not decrease, because M2 includes MO (except bank reserves) and M1. For each of the questions below, answer directly and succinctly. (a) A bank is offering 5-year certificates of deposit (CDs) with a 3% interest rate. The expected inflation rate is 1%. Calculate the expected real interest rate on the CD. (Show your work.) (b) Banks across the country are decreasing nominal interest rates. What will happen to the price of government bonds? istin (c) Explain the relationship between the aggregate measures of the money supply and liquidity. (d) Why would it be impossible for MO to be greater than M1? Explain. For each of the following tasks, calculate the values of MO, M1, and M2 after the indicated change. Show your work where applicable, and clearly identify your answers for each. (e) Initial values: M0 = $100,000, M1 = $240,000, and M2 = $400,000. A person transfers $100,000 from a checking account to a five-year certificate of deposit. MO = M1 = M2 = (f) Initial values: M0 = $60,000, M1 = $130,000, and M2 = $350,000. Someone purchases a $35,000 car with cash. The car dealership deposits the cash into its business checking account. MO = M1 = M2 = (g) Initial values: M0 = $210,000, M1 = $400,000, and M2 = $900,000.A business withdraw $10,000 from its checking account for miscellaneous expenses. MO = M1 = M2 = Money is any commodity that can be used easily to purchase a good or service, which makes its principle function a means of exchange. However, it is important to recognize that money is also used as a unit of account for comparing the value of diverse goods and services as well as a store of value. There are three broad measures of the quantity of money: MO or MB, which is the most liquid monetary base containing circulating cash and coin as well as bank reserves; M1, which includes demand deposits and savings accounts, and M2, which includes time deposit accounts and other less liquid securities. It is important to remember that as money increases in liquidity, from M2 to MO, the total value of M2 does not decrease, because M2 includes MO (except bank reserves) and M1. For each of the questions below, answer directly and succinctly. (a) A bank is offering 5-year certificates of deposit (CDs) with a 3% interest rate. The expected inflation rate is 1%. Calculate the expected real interest rate on the CD. (Show your work.) (b) Banks across the country are decreasing nominal interest rates. What will happen to the price of government bonds? istin (c) Explain the relationship between the aggregate measures of the money supply and liquidity. (d) Why would it be impossible for MO to be greater than M1? Explain. For each of the following tasks, calculate the values of MO, M1, and M2 after the indicated change. Show your work where applicable, and clearly identify your answers for each. (e) Initial values: M0 = $100,000, M1 = $240,000, and M2 = $400,000. A person transfers $100,000 from a checking account to a five-year certificate of deposit. MO = M1 = M2 = (f) Initial values: M0 = $60,000, M1 = $130,000, and M2 = $350,000. Someone purchases a $35,000 car with cash. The car dealership deposits the cash into its business checking account. MO = M1 = M2 = (g) Initial values: M0 = $210,000, M1 = $400,000, and M2 = $900,000.A business withdraw $10,000 from its checking account for miscellaneous expenses. MO = M1 = M2 =

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