Reference no: EM131344854
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.
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?
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.
d) If the process of money creation continues what is the total money supply resulting from your initial $2,000 deposit?
2) What is the role of the central bank and commercial banks in the process of money multiplication?
3) What do you think happens to the money multiplier in a financial crisis (like the one we had in year 2008), and why?
4) Through what instrument does the central bank carry out monetary policy? How do the bank's actions transmit through the economy?
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?
b) Other economists think that there are significant costs associated with inflation above 2-3%. What are they?
c) What are the other costs be to consider if the inflation rate unexpectedly turns out to be higher than 7%?
6) Some economists hold the views that Australia is heading to a recession (eg, see such a view, https://www.abc.net.au/news/2016-07-29/australia-headed-for-recession-next-year,-professor-keen-says/7674154
Supposing the Australian economy is heading for recession what in your view should (or can) the current government do to deal with this? 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.
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: 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. How does your deposit change the Bank's T-account? Show the T-account changes
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