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RMIT ECON1010 Assignment 2 – Monetary System

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RMIT ECON1010 Assignment 2 – Monetary System

MACRO1(ECON1010) Assignment 2

Submit online by: 11:59PM 2 Oct (Sunday)
(‘Assessment Task’ in Blackboard)
Tutorial Time and Day:
Student Name:

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
• This
assignment contributes to 20% of the overall marks for the course.
• Only a
single attempt of submissionpermitted (hence, please ensure to attach the file
version of the assignment)

• Use this
Word template onlyfor your submission (i.e., write down your answers in the
space 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 and
in “APPS” you find Microsoft word processor;

• The
recommended browsers when uploading the file are Chrome, Firefox or Explorer
(some have 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 the
allocated 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 for
the late submission (all requests for an extension of this nature will be
rejected immediately).
• Make sure
you have included your student ID and name in the front page of the assignment
• Working
with other fellow students is strongly encouraged. However, you cannot just
copy your friend’s answers. If we find out this, you will be harshly punished
for the academic plagiarism. See‘students responsibilities’ at RMIT’s policy on
• http://www1.rmit.edu.au/browse;ID=sg4yfqzod48g1


Short Answer Questions:
• The font
size has to be at least 12.
• Use the
template and provide answer a space in each question

1) You have
decided to deposit $2,000 in a savings account in the Commonwealth Bank, which
does not 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 to make the maximum possible loan from the deposited funds. Following
from the T-account in Part 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
the person receiving the cheque deposits it in WestPac Bank which also
maintains a reserve ratio of 0.2. 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 your initial $2,000 deposit? (1 mark)


2) What is
the role of the central bank and commercial banks in the process of money
multiplication? (2 marks)

3) What do
you think happens to the money multiplier in a financial crisis (like the one
we had in year 2008), and why?(2 marks)

4) Through
what instrument does the central bank carry out monetary policy? How do the
bank’s actions transmit through the economy? (2 marks)


5) 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 higher than 7%?(2 marks)


6) (4
marks)Some economists hold the views that Australia is heading to a recession
(eg, see such a view,
Supposing the Australian economy is heading for recession
what in your view should (or can) the current government do to deal withthis?
Use the economics tools that you have studied in this course to elaborate a
discussion. You need to write at least half a page in length. Note that presenting
a list of reference is preferred. But not required.

(Provide answer below)

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