1. Which function of money is disrupted as a result of high inflation? Why?
2. The central bank of Fiji has issued $1,000,000 in Fijian dollars. What is the size of money supply in this country if
a) Fijians have deposited none of the currency in Fijian banks?
b) Fijians have deposited all of the currency in Fijian banks and the banks have a 100% target reserve ratio?
c) Fijians have deposited 50% of the currency in Fijian banks and the banks have a 50% target reserve ratio and are fully loaned up?
d) Fijians have deposited 50% of the currency in Fijian banks and the banks have a 5% target reserve ratio and are fully loaned up?
(Hint: Keep in mind that money supply consists of currency and demand deposits.)
3. Use a money market diagram (MD and MS) to illustrate and explain the effect of increasing money supply on the interest rate (r). Explain the sequence of events that lead to this change in the interest rate. How does the change in the interest rate affect output (Y)? Explain.
4. Do question 40U at the bottom of page 343 of the textbook. (Show all work.)
5. A country is producing a prescription drug at a price (PD) which is above the international (PW). Illustrate this with a market diagram and indicate what this country should do to satisfy its needs if trade id free. Under the pressure of domestic producers the government of this country imposes a tariff equal to half of the difference between PD and PW. Show the effect of this tariff on the amount of drugs imported to the country.
6. Assume a fixed exchange rate (ERF) is set equal to the market price of the local currency (ER) where demand for and supply of the currency are equal. If the demand for local currency decreases, what kind of pressure is created in the market for this currency? If the central bank of this country wants to maintain the fixed exchange rate, what should it do? Explain and illustrate your answers on a market diagram.