Initially, the Republic of Gorgonzola has no commercial banking system. To make trading easier and eliminate the need for barter, the government directs the central bank of Gorgonzola to put into circulation 4,000,000 identical paper notes, called guilders. The central bank prints the guilders and distributes them to the people. At this point the Gorgonzolan money supply is 4,000,000 million guilders. In order to keep the money safe, some Gorgonzolan entrepreneurs set up a system of commercial banks. When people need to make a payment, they can either withdraw their guilders or write a check on their account. Checks give the banks permission to transfer guilders from the account of the person paying by check to the account of the person to whom the check is made out. With a system of payments based on checks, the paper guilders need never leave the banking system, although they flow from one bank to another as a depositor of one bank makes a payment to a depositor in another bank. Deposits do not earn interest in this economy. Let’s suppose for now that people prefer bank deposits to cash and so deposit all of their guilders with the commercial banks. Assume that (1) initially, the Gorgonzolan central bank puts 4,000,000 guilders into circulation and (2) commercial banks desire to hold reserves of 20 percent of deposits. Assume that the public holds no currency. Instructions: Enter your responses as whole numbers. a. The consolidated balance sheet of Gorgonzolan commercial banks after the initial deposits is: Initial balance sheet Assets Liabilities Currency Deposits b. The consolidated balance sheet of Gorgonzolan commercial banks after one round of loans is: Balance sheet after first round of loans Assets Liabilities Currency (= reserves) Deposits Loans c. The consolidated balance sheet of Gorgonzolan commercial banks after the first redeposit of guilders is: Balance sheet after redeposits Assets Liabilities Currency (= reserves) Deposits Loans
IS-LM-PC Analysis
The IS (Investment Saving), LM (Liquidity Preference- Money Supply), and PC (Philips Curve) is the model that looks at the dynamics of output and inflation. It takes into account the central bank policy decision to adjust the inflation and real interest rate in the economy. It enables the economist to weather to priorities between employment and inflation rate analyzing the model. It is a practice-driven approach adopted by economists worldwide.
IS-LM Analysis
The term IS stands for Investment, Savings, and LM stands for Liquidity Preference, Money Supply. Therefore, the term IS-LM model is known as Investment Savings – Liquidity preference money Supply. This model was introduced by a Keynesian macroeconomic theory which shows the relationship between the economic goods market and loanable funds market or money market. In other words, it shows how the market for real goods interacts with the financial markets to strike a balance between the interest rate and total output in the macroeconomy. This particular model is designed in the form of a graphical representation of the Keynesian economic theory principle. The output and money are the two important factors in an economy.
Initially, the Republic of Gorgonzola has no commercial banking system. To make trading easier and eliminate the need for barter, the government directs the central bank of Gorgonzola to put into circulation 4,000,000 identical paper notes, called guilders. The central bank prints the guilders and distributes them to the people. At this point the Gorgonzolan money supply is 4,000,000 million guilders.
In order to keep the money safe, some Gorgonzolan entrepreneurs set up a system of commercial banks. When people need to make a payment, they can either withdraw their guilders or write a check on their account. Checks give the banks permission to transfer guilders from the account of the person paying by check to the account of the person to whom the check is made out. With a system of payments based on checks, the paper guilders need never leave the banking system, although they flow from one bank to another as a depositor of one bank makes a payment to a depositor in another bank. Deposits do not earn interest in this economy.
Let’s suppose for now that people prefer bank deposits to cash and so deposit all of their guilders with the commercial banks. Assume that (1) initially, the Gorgonzolan central bank puts 4,000,000 guilders into circulation and (2) commercial banks desire to hold reserves of 20 percent of deposits. Assume that the public holds no currency.
Instructions: Enter your responses as whole numbers.
a. The consolidated balance sheet of Gorgonzolan commercial banks after the initial deposits is:
Initial balance sheet
| Assets | Liabilities | ||
| Currency | Deposits |
b. The consolidated balance sheet of Gorgonzolan commercial banks after one round of loans is:
Balance sheet after first round of loans
| Assets | Liabilities | ||
| Currency (= reserves) | Deposits | ||
| Loans |
c. The consolidated balance sheet of Gorgonzolan commercial banks after the first redeposit of guilders is:
Balance sheet after redeposits
| Assets | Liabilities | ||
| Currency (= reserves) | Deposits | ||
| Loans |
d. The consolidated balance sheet of Gorgonzolan commercial banks after two rounds of loans and redeposits is:
Balance sheet after second round of loans and redeposits
| Assets | Liabilities | ||
| Currency (= reserves) | Deposits | ||
| Loans |
e. The final values of bank reserves, loans, deposits are:
Final consolidated balance sheet
| Assets | Liabilities | ||
| Currency Final value of bank reserves | Deposits | ||
| Loans |
The final value of the money supply is:
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