ECON1010 Assignment 2 – Monetary System

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ECON1010 Assignment 2 – Monetary System

Macro1 (ECON1010), 2sem 2016MACRO1 (ECON1010) Assignment 2(Chapter 28, 26&28)Submit online by: 11:59PM 2 Oct (Sunday)(‘Assessment Task’ in Blackboard)Tutorial Time and Day:____________________________________________________________________________________Student Name:____________________________________________________________________________________ID:____________________________________________________________________________________This assignment covers the following topics:Monetary System (Chapter 29)Inflation: Its causes and costs (Chapter 30)Aggregate demand and supply (Chapter 33)Instructions to students: READ THE FOLLOWING FIRST (Very Important)This assignment contributes to 20% of the overall marks for the course.Only a single attempt of submission permitted (hence, please ensure to attach the file versionof the assignment)Use this Word template only for your submission (i.e., write down your answers in thespace provided in each question and submit) – any other form of the file is NOT accepted(Failing to do so will automatically mean zero mark for this task).If you do not have a word processor installed in your home computer, follow this link andin “APPS” you find Microsoft word processor;http://www1.rmit.edu.au/students/mydesktopThe recommended browsers when uploading the file are Chrome, Firefox or Explorer (somehave suggested that Safari might not work well).The font size has to be at least 12.Explain your answers, but be succinct.Label each axis and explain the diagram that you use carefully (if any).Show all of your working in order to get partial credits.Please ensure to attach the final version of the assignment.After the due date any late submission will be marked as ‘late’. A penalty of 10% of theallocated marks (i.e., 2 marks) per day will apply for late submissions.A failure of your home computer (or any kind of the IT problem) cannot be a reason forthe late submission (all requests for an extension of this nature will be rejectedimmediately).Make sure you have included your student ID and name in the front page of the assignmentPage 1 of 6Macro1 (ECON1010), 2sem 2016Working with other fellow students is strongly encouraged. However, you cannot just copy yourfriend’s answers. If we find out this, you will be harshly punished for the academic plagiarism.See ‘students responsibilities’ at RMIT’s policy on this:http://www1.rmit.edu.au/browse;ID=sg4yfqzod48g1Page 2 of 6Macro1 (ECON1010), 2sem 2016Short Answer Questions:The font size has to be at least 12.Use the template and provide answer a space in each question1) You have decided to deposit $2,000 in a savings account in the Commonwealth Bank, which doesnot have any excess reserves at the time when you make a deposit.a) How does your deposit change the Bank’s T-account? Show the T-account changes. (1 mark)b) Now the Bank is told to maintain a reserve ratio of 0.2 (ie, 20 percent). The Bank decides tomake the maximum possible loan from the deposited funds. Following from the T-account inPart a), what does the T-account look like now? (1 mark)c) Now, somebody who took out the loan in Part b) writes a cheque for the amount and then theperson receiving the cheque deposits it in WestPac Bank which also maintains a reserve ratio of0.2. Show how this changes the T-account of WestPac Bank. (1 mark)d) If the process of money creation continues what is the total money supply resulting from yourinitial $2,000 deposit? (1 mark)Page 3 of 6Macro1 (ECON1010), 2sem 20162) What is the role of the central bank and commercial banks in the process of moneymultiplication? (2 marks)3) What do you think happens to the money multiplier in a financial crisis (like the one we had inyear 2008), and why? (2 marks)4) Through what instrument does the central bank carry out monetary policy? How do the bank’sactions transmit through the economy? (2 marks)Page 4 of 6Macro1 (ECON1010), 2sem 20165) Suppose that the price level in Australia is expected to rise by 7% in 2017.a) Why do some economists claim that we should not worry too much about inflation at this level?(2 marks)b) Other economists think that there are significant costs associated with inflation above 2-3%.What are they? (2 marks)c) What are the other costs be to consider if the inflation rate unexpectedly turns out to be higherthan 7%? (2 marks)Page 5 of 6Macro1 (ECON1010), 2sem 20166) (4 marks) Some economists hold the views that Australia is heading to a recession (eg, see such aview, http://www.abc.net.au/news/2016-07-29/australia-headed-for-recession-next-year,-professorkeen-says/7674154Supposing the Australian economy is heading for recession what in your view should (or can) thecurrent government do to deal with this? Use the economics tools that you have studied in thiscourse to elaborate a discussion. You need to write at least half a page in length. Note thatpresenting a list of reference is preferred. But not required.(Provide answer below)