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Macroeconomics Week 9

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Lillian Kobusingye
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24 views2 pages

Macroeconomics Week 9

Uploaded by

Lillian Kobusingye
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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ZHEJIANG GONGSHANG UNIVERSITY

SCHOOL OF BUSINESS ADMINISTRATION

COURSE: MACROECONOMICS

STUDENT NAME: Lillian Kobusingye

NATIONALITY: UGANDAN

STUDENT NUMBER: 21010019014

WEEK 9
1. What is commodity money? What is fiat money? which kind do we use?

Commodity money is money that takes the form of a commodity with intrinsic value for
example Gold, cigarettes while fiat money is without intrinsic value. Fiat money is used
as money because of government decree or order. The value of fiat money is based
largely on public faith in the issuer. Commodity money's value, on the other hand, is
based on the material it was manufactured with, such as gold or silver. Fiat money,
therefore, does not have intrinsic value, while commodity money often does.
We use Fiat money as it’s a legal tender for all debts, public and private.

2. If the Fed wants to increase the money supply with open-market operations, what does it
do?

In open operations, the Fed buys and sells government securities in the open market. If
the Fed wants to increase the money supply, it buys government bonds. This supplies the
securities dealers who sell the bonds with cash, increasing the overall money supply.

3. Bank A has a leverage ratio of 10, while Bank B has a leverage ratio of 20. Similar losses
on bank loans at the two banks cause the value of their assets to fall by 7 percent. Which
bank shows a larger change in the bank capital? Does either bank remain solvent?
Explain

If we take as an example that the total assets of Bank A are 100 dollars, the leverage ratio
is 10, then the borrowed amount of money is 90 dollars and its capital is 10 dollars. When
the value of the assets falls by the 7%, this bank would have 93 dollar assets and 90
dollars would still be the borrowed money.

If we use as an example the total assets of Bank B is 100 dollars, the leverage ratio is 20,
then the borrowed amount of the money is 95 dollars and its capital is 5 dollars. When the
value of the assets falls by 7%, this bank would have 93 dollars but 95 dollars would be
the borrowed money and this bank wouldn’t remain solvent because its liabilities would
be higher than its assets. Bank B would be unable to pay off debt and depositors in full

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