1. Suppose the money supply is $250, the price level is $4.25, and real GDP is 400.

1.1 Find nominal GDP and the velocity of money.

1.2 If the velocity of money increases to 7 and there is a 5% increase in real output and a 20% increase in the money supply, what will be the price level?

2. You are given the following information about the commercial banking system in country X:

                        $ million

Total Reserves                 250

Total Loans                    1,000

Total Deposits                2,000

Total Assets                   2,500

 2.1 Construct a balance sheet for this banking system.

2.2 Calculate the banks' reserve ratio.

2.3 If an immigrant arrives with $1,000 and put the entire amount into a bank deposit, what are the total changes in bank deposits and bank loans if the reserve requirement ratio is 10% and banks do not keep excess reserves? What is the value of the deposit multiplier?

2.4 If the Central Monetary Authority is the sole issuer of bank notes and coins, and there are $50 million worth of coins in the hands of the non-bank public. Assuming the required reserve requirement is 10%, calculate the monetary base. What is the value of the money multiplier?

2.5 If the Central Monetary Authority undertakes an open market purchase of securities of $1 million, what will happen to the money supply?

3. Lee withdraws $25,000 from his saving account in Citibank. He immediately deposits $5,000 into his current account at Hong Kong Bank, and then puts $10,000 as a time deposit in a deposit-taking company. He keeps the rest for personal consumption. What are the effects of Lee's transactions on the M1, M2 and M3 money supply of Hong Kong?

4. Suppose the current interest rate is 10% , the real GDP is $5000 and the price level is 1. The demand for money, which is 20% of the nominal GDP, decreases by $50 for every 1% rise in interest rate. What is the equilibrium interest rate if the real money supply is $750?

Money and Banking - Discussion Topic Questions:

 I. Assume a local household currently had $100,000 which it wished to hold for use one year later. Which of the following do you think is the best store of value over that period? Why?

(a) Hong Kong Dollars

(b) US Dollars

(c) Hang Seng Bank shares

(d) Gold

II. Discuss the use of each of the followings as a medium of exchange and whether it should be

included in the measures of money:

(a) Mondex cards

(b) Gold coins

(c) Traveller cheques

(d) VISA credit cards