Question Now we introduce banks that will act as liquidity providers in the economy. Suppose that banks are able to issue private IOU's, such that individuals deposit goods with the bank and the bank can promise a return on the deposit. We start by assuming that there is no reserve requirement or lending by the Central Bank. (a) Suppose a young individual wants to use one consumption good to acquire money. What return does the bank need to promise the individual to have them deposit the good with the bank instead? (b) Suppose that when the individual deposits a good with the bank, the bank uses this good to create capital. Further, suppose that when the bank offers a return on deposits that is equal to the real rate of return on money then the individual will choose to deposit with the bank instead of acquiring money. A young individual in period t deposits one good with the bank when young. Suppose no young individuals in period t+1 make deposits. How does the bank pay the young individual from t their promised return?

Question Now we introduce banks that will act as liquidity providers in the economy. Suppose that banks are able to issue private IOU's, such that individuals deposit goods with the bank and the bank can promise a return on the deposit. We start by assuming that there is no reserve requirement or lending by the Central Bank. (a) Suppose a young individual wants to use one consumption good to acquire money. What return does the bank need to promise the individual to have them deposit the good with the bank instead? (b) Suppose that when the individual deposits a good with the bank, the bank uses this good to create capital. Further, suppose that when the bank offers a return on deposits that is equal to the real rate of return on money then the individual will choose to deposit with the bank instead of acquiring money. A young individual in period t deposits one good with the bank when young. Suppose no young individuals in period t+1 make deposits. How does the bank pay the young individual from t their promised return?

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter18: Savings,investment And The Financial System

Section: Chapter Questions

Problem 8PA

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