How Does Johns Take $ 10, 000 And Deposit In The Banking System

Question 1
a)
i
If Johns takes $10,000 and deposit in the banking system, the total amount of of deposits in the banking system increase by $100,000 ( $10,000 x 10), because the reserve ratio is of 10% which mean the money multiplier is 1/R= 1/0.10 = 10. ii As bank deposits are part of the money supply, so John deposited $10,000 but the bank is required to keep a ratio of 10% or $10,000. Taking in consideration i above by using the money multiplier the bank is allowed to make a maximum of $90,000 or 10 x $$10,000= $100,000 - $10,000= $90,000
Therefore, the money supply increases by $90,000, because deposit increases to $100,000 but declines by $10,000. iii The central bank cannot perfectly control the money supply because: They cannot control
The banks might choose to hold a higher ratio of reserves depending on their risk policy. If banks hold more than minimum required it will generate excess reserves.
In order to influence the excess reserves the central bank might consider changing the discount rate.
For example: If the central bank lower the discount rate, banks might borrow more money with a cheaper rate, by doing that , banks can invest in more projects or loan it out for profits that they would not do otherwise with a higher interest rate.
In the other hand, if central bank rise the discount rate it causes the opposite effect and banks will refrain on taking loans. Banks might also decide to hold higher reserves due economic concerns. Due to those, Central bank cannot perfectly control how much money the banking system will create.

Question 2

a) i Considering equation, M is money supply, V is the velocity of money and
Nominal GDP being P Y = % P + % Y= 0,05, % V= 0,01
Real GDP, %Y is expected to be constant. %∆M + %∆V= %∆P+%∆Y
%∆M= ( %∆P +∆ %Y)- %∆V
%∆M= 0,05- 0,01= 0,04 Therefore, the annual money growth rate is 4%.

ii
Real GDP %∆ Y= 0,02
%∆M + %∆V = %∆P +
People will refrain on exchanging goods or services for money if they think the value of money will decrease. Therefore, people will demand more money for trades consequently increasing the rate of inflation. In extreme cases of hyperinflation money might lose its value so rapidly that people might lose confidence in using it.

As for unit of account, inflation affects it in two ways: 1) if prices are unstable it makes difficult for people to have a mean to compare prices. This will create a situation of constant disequilibrium. 2) If prices are changing by different amounts during inflation it makes difficult to have a means of comparison if prices are in constant change.

Finally, store of value it is the one function that is affected the most. By knowing that money will be worthless in the future it changes patterns of spending, as inflation decreases value of money. In case of hyperinflation money will no longer perform as a store of value. If banks for example offer interest rate at 10% but inflation is at 60%, savings money will act as a negative savings. Things that cost an amount today will cost more in the future. It will affect the time of transactions and the amount require for payments in the