Week 2

Question 1

Commodity Standards

Answer 1

Under a commodity standard, the monetary unit is defined as a certain weight and fineness of precious metal

Question 2

Gold Flow

Answer 2

-higher real price (ppg) brings greater quantity supplied
-exploit sources with higher extraction / refining cost
-higher real price (ppg) reduces flow quantity consumed
-substitution into other metals for industrial use

Question 3

Gold Stock Curves Shift

Answer 3

1. Monetary stock demand curve for gold shifts out
   - large country joings the international gold standard
   - real income growth in gold-standard countries
2. Monetary stock demand curve for gold shifts in
   - large country leaves the gold standard
   - banks manage with even lower reserve ration

monetary stock supply shifts are reversed by assumulation

3. Monetary stock supply curve for gold shifts out
   - discovery and looting of Aztecs and sunken ship salvage
4. Monetary supply curve for gold shifts in
   - sudden craze for genuine gold jewelry
   - revolutionary semiconductor utilizing gold hits the market

Question 4

Flow Shifts

Answer 4

1. Flow demand curve shifts out
   - new industrial use for gold
2. Flow demand curve
   -shifts in
   new industrial substitute for gold
3. Flow supply curve shifts out
   -new gold mines opened (California 1849-59)
   -cyanide process invented
4. Flow supply curve shifts in
   - existing mine collapses
   - exogenous miner’s wage increase

Question 5

Commodity Standards and the macroeconomy

Answer 5

1. Lower average inflation and corresponding inflation expectations
   - Lower deadweight costs on money-holders and savers
2. Lower price level uncertainty in the long-run
   - Thicker bond markets
   - Price level fluctuations and the Fischer effect
3. Network benefits
   - Lower transaction costs
   - Negligible exchange rate risk
4. Lower resource costs of gold mining
   - Gold price has risen drastically since the end of the gold standard.
5. Fiscal and monetary discipline

Question 6

Bimetallism

Answer 6

case where the monetary unit is defined by two precious metals (silver and gold), with the two’s exchange rate being fixed to a definite proportion

Question 7

Issues with Bimetallism

Answer 7

1. It requires the fixing of exchange rates between two commodities (silver and gold)
2. Eventually, the real exchange rate moves far enough from the one set by edict, and one of the two metals becomes undervalued, ceases to circulate.
3. Over a long-enough time span, de jure bimetallism becomes de facto monometallism.

Question 8

Financial Market

Answer 8

Borrowing and lending of funds

Question 9

Bank Balance Sheet

Answer 9

Assets: Loans
Liabilities: Deposits (demand, savings, time)
Equity Capital: Funds put forth by the owners of shareholders of the bank to serve as a cushion in the event of illiquidity, runs, or panics. Can be used to compensate depositors.