Unit 9 Problem Set 1: Monetary Policy and Inflation

1. Consider an economy that uses gold as its currency. Define each of the three properties of money listed below. Considering these properties, is gold a good monetary system? a. Medium of exchange: any item that buyers give to sellers when they purchase goods and services. b. Unit of account: a standard unit in which prices can be stated and the value of goods and services can be compared. c. Store of value: the property of money that holds that money preserves value until it is used in an exchange. d. Is gold a good monetary system? Gold standard works for a while. It is just that we are running out of gold. It was supposed to keep the government in check for the amount of money that it could print, but then in times of trouble it would use the gold as an emergency fund that it would have to pay back, sometime. It use to work in international trade systems on larger scale because of different types of currency. We now have the fiat money which is just money that the government can have better control on.

2. Given your answers to the previous question, explain whether you think gold had advantages over the use of fiat money.
You can’t just print gold like you can paper money. When you have the ability to just print money, everything else will also go up in price because there is no real value to paper money. Gold has a better value to it because you know that if you don’t have it, you will get nothing in return so it would keep you in check. 3. Growth in Federal Reserves: a. Do banks prefer to keep reserves or make loans when reserves do not pay interest? If the bank makes no money while that money is sitting in the bank, it would want to loan it out to make an interest on it. So loan it out. b. What would be the danger if the Federal Reserve set an interest rate on