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    Required Reserve Ratio 13%

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    Ahsan Ali
    Alipay can be considered a form of digital money as it satisfies the key functions of money: 1) as a medium of exchange through transferring funds between users, 2) as a measure of value through acting as a common unit of account, and 3) allowing for deferred payments through storing value in a digital wallet. An increase in reserve requirements by banks will decrease the money supply through less funds available for lending, contracting the economy. A recession is indicated when actual GDP is below potential GDP, with the size of the output gap quantifying the severity of the downturn.

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    Required Reserve Ratio 13%

    Uploaded by

    Ahsan Ali
    13 views2 pages
    Alipay can be considered a form of digital money as it satisfies the key functions of money: 1) as a medium of exchange through transferring funds between users, 2) as a measure of value through acting as a common unit of account, and 3) allowing for deferred payments through storing value in a digital wallet. An increase in reserve requirements by banks will decrease the money supply through less funds available for lending, contracting the economy. A recession is indicated when actual GDP is below potential GDP, with the size of the output gap quantifying the severity of the downturn.

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    Alipay can be considered a form of digital money as it satisfies the key functions of money: 1) as a medium of exchange through transferring funds between users, 2) as a measure of value through acting as a common unit of account, and 3) allowing for deferred payments through storing value in a digital wallet. An increase in reserve requirements by banks will decrease the money supply through less funds available for lending, contracting the economy. A recession is indicated when actual GDP is below potential GDP, with the size of the output gap quantifying the severity of the downturn.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    13 views2 pages

    Required Reserve Ratio 13%

    Uploaded by

    Ahsan Ali
    Alipay can be considered a form of digital money as it satisfies the key functions of money: 1) as a medium of exchange through transferring funds between users, 2) as a measure of value through acting as a common unit of account, and 3) allowing for deferred payments through storing value in a digital wallet. An increase in reserve requirements by banks will decrease the money supply through less funds available for lending, contracting the economy. A recession is indicated when actual GDP is below potential GDP, with the size of the output gap quantifying the severity of the downturn.

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    of 2

    Question B1.

    a) Yes, Alipay can be treated as money. It is a digital platform to give effect to day to day
    transactions. It can be called digital money. It satisfies the functions of money as follows:
    1. Medium of Exchange: It acts as medium of exchange as you can transfer money
    from Alipay to the other user. Also you can receive money from the same platform.
    It is linked to bank accounts which allows you to transfer money in exchange of
    goods.
    2. Measure of value: Money's function is to act as a measure of value i.e. a common
    denomination to measure value of goods. It also helps to use money in the form of
    digital transfers as a common denomination. In other words, it involves money in
    return of your purchase so a common denomination i.e. money is used through this
    app.
    3. Standard of Deferred Payment: You can use Alipay to transfer money for goods in
    future as well.
    4. Store of value: Alipay acts as a store of value i.e. you can keep your money saved
    in a digital wallet to use it as and when required.
    b)
    i) Deposits = $28,200
    Total Reserves = $4230
    Total reserves = required reserves + excess reserves
    4230 = Required Reserves + 564
    4230 - 564 = required reserves
    Required Reserves = 3666
    Required reserves = required reserve ratio   deposits
    3666 = RR ratio   28200
    3666 / 28200 = RR ratio
    Required reserve ratio = 0.13  100    (multiply with 100 to convert in %)
    Required reserve ratio = 13%
    Money supply (M1) = Cash + Demand deposits (C+DD)
    M1 = 688 + 28200
    M1 = $28,888 MILLION
    ii)

       ASSETS    LIABILITIES

    $(MILLION) $(MILLION)

    required reserves 4,360 deposits 27,250

    excess reserves 545

    loans 22,345

    TOTAL 27250 TOTAL 27,250


    W
    orking:
    New deposits = 28,200 - 950 = 27,250 (because $950 million is withdrawn, the
    deposits will decrease)

    Required reserve ration (new) = 13% + 3% = 16%


    required reserves = 16 (27250)/100 = 4360
    Total reserves earlier were 4230 i.e. 15% of 28,200. There is 2 % excess reserve.
    New excess reserve = 2(27250)/100 =545
    Loans to be given = 100 - 16 = 27,250 - (4360 + 545) = 22,345

    c) With the increase in the reserve ratio, the Central Bank follows Contractionary Monetary
    Policy. It will decrease the money supply because with the increase in the required
    reserve ratio, there will be more amount kept as reserves with banks and it won’t be used
    for giving loans. It means there will be less money available to give loans to the public.
    This will decrease the money flow in the economy.

    Question B2

    a)
    i) Using Expenditure method,

    GDP ($ Million) = Private consumption + Net domestic fixed capital + Change in


    inventories + Government expenditure + Total Exports of goods - Re-export of
    goods + Export of services - Import of goods - Import of services

    = 500 + 250 + 30 + 100 + 800 - 200 + 300 - 900 – 150

    = 730

    ii) Since actual GDP is less than potential GDP, there is a negative output
    (recessionary) gap and economy is in recession stage.

    Recessionary gap ($ Million) = 1010 – 730

    = 280

    iii) Government spending increases by $10,000 and imports increase by $200,000.

    Decrease in GDP = 200,000 - 10,000 = $190,000

    b) Labor force (LF) = Employed + Unemployed = 180 + 20 = 200

    Working age population (WP) = LF + Not in labor force = 200 + 50 = 250

    LFPR = LF / WP = 200/250 = 0.8 = 80%

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