Ugbs 204 Tutorial Set 4 Solutions-Gabriel Nartey.
Ugbs 204 Tutorial Set 4 Solutions-Gabriel Nartey.
Ugbs 204 Tutorial Set 4 Solutions-Gabriel Nartey.
PROBLEM ONE
In ordinary language, clearly distinguish between the following pairs of concepts.
a. Fiscal and Monetary Policy
Fiscal Policy refers to the use of government spending or taxes to affect economic activity.
Monetary Policy on the other hand refers to the process in which the central bank increases or
decreases the money supply in order to influence the level of economic activity and or/ stabilize
prices.
b. Expansionary Monetary Policy and Contractionary Monetary Policy
Expansionary monetary policy is a policy where the central Bank increases the money supply in
the economy. Whilst contractionary monetary policy is a policy where the central bank reduces
the supply.
c. Expansionary Fiscal Policy and Contractionary Fiscal Policy.
Expansionary fiscal policy refers to the increase in government spending or decrease in taxes to
stimulate the level of economic activities whilst contractionary fiscal policy refers to the
decrease in government spending or increase in taxes to decrease the level of economic
activities.
d. Primary budget deficit and overall budget deficit
Primary budget deficit is the difference between current government spending on goods and
services and total current revenue from all types of taxes net of transfer payments. Primary
deficit can be gotten by deducting interest payment from fiscal deficit/total revenue-total
expenditure excluding interest payment. While overall budget deficit is the excess total
government expenditure over total government receipts. Overall budget can be arrived at by
summing primary deficit plus interest payments on borrowings.
e. Official reserves assets and Official settlement balance
Official reserve assets refers to assets such as gold, foreign bank deposit and special asset
account created by the IMF that are held by central banks, that can be used in making
Official reserves are assests such as foreign deposite created by IMF that are held by the central
bank that can be used in making international payment.
Primary deficit refers to the difference between the current year's fiscal deficit and interest payment
on previous borrowings
international payments. Official settlement balance on the other hand refers to the net increase
in a country’s official reserve assets. It is used to keep track of the Central Bank' reserves.
f. Capital market and financial intermediaries
Capital markets are markets that trade in financial instruments such as bonds, stocks and
currency, while financial intermediaries are institutions that provide financial services and
products.
g. Narrow money and broad money
Narrow money is the most liquid form of money, it generally consist of paper currency(notes),
coins, and demand deposits held by banks. Broad money is less liquid but the most inclusive form
of money and it is made up of narrow money in addition to saving accounts and time deposit
accounts.
g. Money supply multiplier and autonomous expenditure multiplier.
Money supplier multiplier is a multiple by which money supply changes if there is a change in
bank deposits. Whilst autonomous expenditure multiplier is a multiple by which equilibrium
income changes if there is a change in any autonomous components, except taxes.
PROBLEM TWO
All else being equal, how would each of the following affect the demand for M1? The
demand for M2? Explain.
• Narrow money or M1 which consists of Paper currency and coins with the public
Demand deposits (checking) accounts. M1 money supply includes coins and currency in
circulation
• M2 include m1, Savings accounts, Time deposit accounts. In Ghana, there is also M2+
which is M2 plus foreign currency deposits
a) Home equity lines of credit that allow home owners to write checks against the value
of their homes are introduced.
This will reduce the demand for M1 and M2. Being able to write checks against home means that
owning homes now offers almost the same level of convenience that holding M2 offers in terms of
transactions. Since home values increases very rapidly, with the added convenience transactions,
we should expect households to hold more of their wealth in homes compared with M2 and M1.
b) The stock market crashes, and further sharp declines in the market are widely
feared.
ii. You move some money from checking account into your savings account
M1 decreases and M2 remains unchanged
d) Using money market, explain the effect of this decrease in the MPR on the real
interest rate.
a. Given a required reserve ratio of 20 percent, what is the maximum deposit that can
be created by commercial banks from an initial deposit of 30,000 Ghana cedis?
Explain why this maximum deposit may not be achieved in reality.
1
Max Deposit = 𝑅𝑅 × 𝐼
= 150,000
This maximum deposit will not be achieved in reality because not all the initial will
go through the banking system.
b. If Commercial Banks receive a total of ₵100 min deposits with a 10% required
reserves out of total deposits.
1
Money Multiplier = 𝑅𝑅
1
=0.1
=10
=1000
(iii.) If the central bank now raises required reserve to 20% of deposits,
what is the value of money multiplier.
1
Money Multiplier =𝑅𝑅
1
=0.2
=5
=500
a. You take ₵200 you have kept under your pillow and deposit it in your bank
account. If the required reserves is 5% of total deposits, Find the change in money
supply as a result of your deposit.
1
∆Money Supply=𝑅𝑅 × ∆𝐷
1
∆Money Supply=0.05 × 200
=4000
e. Mention three tools used by the central bank to conduct monetary policy
• Open Market Operations (OMO)
• Reserve requirement policy
• Discount rate Policy
f. Identify and explain two motives for holding money. Explain two determinants of each
motive identified.
Three motives of holding money; Transactional, precautionary and
speculative(asset)motives.
THE END.
THANK YOU.
Be diligent.
James 1:17