Group Assignment #4:

Answer on a separate sheet. Only one copy is needed per group. Include the names of all group members. Be legible—I have to read it. No more than four persons can be in a group. No splitting up the assignment—you work on it together. You can be a group of one. You can hand it to me at the end of class or put it in mailbox by 3:00 PM Friday April 18th.

 

1)      (1 point) Take a dollar bill from your wallet. Anyone without any currency can share with someone who does. What can be learned from a dollar? Is it fiat or commodity money? What’s the difference? What Federal Reserve Bank was it printed at?

 

2)      (2 points) We are going to create a Laffer Curve for Pepperidge Farm Milano cookies. Suppose I was willing to sell Pepperidge Farm Milano cookies for 50 cents a piece. How many cookies would your group buy if there were no taxes? What about a 10 cent per cookie tax? What about a 20 cent per cookie tax? Continue in this fashion, until no cookies are bought. Then figure out the Tax Revenue for each tax; if you have a 25 cent tax and 13 cookies are sold that makes tax revenue .25*13 = $3.25. Then calculate the Tax Rate for each tax; this is the percent of consumer spending spent on taxes (i.e. 100 * Tax Revenue / Consumer Spending). Graph the Tax Revue versus the Tax Rate (with the Tax Rate on the horizontal axis); this is a Laffer Curve.

 

3)      Story time:

We are going back in time, back to a time when knights roamed the countryside and money was gold. In those days, bandits also roamed the countryside and people with money looked for a safe place to keep their gold. Goldsmiths had safes and strong rooms to protect their product. People turned to the goldsmith to protect their gold, as well.

In the early days, putting money away for safe-keeping was like a coat check: your coins were stored and the same exact coins would be returned. Eventually the goldsmiths came up with an early financial innovation: depositors didn’t care if they got their own coins back, as long as they received the proper amount of money.

a)      Now, let’s look at a transaction in those olden days. Suppose you wanted to buy a quiver of arrows from the fletcher (the technical term for someone who makes arrows). In addition suppose you and the fletcher both used Goldsmith A to store all of your gold (i.e. you keep none of your gold in your homestead). Assume that you must start and end in your homestead, and the fletcher must start and end in his shop. Also assume that any gold the fletcher gets he will want to convert into a bank note. (1/4 a point each)

i)        How many miles of traveling is required if you pay the fletcher in gold? (Note by this I mean total traveling by all agents, so a mile you travel is counted the same as a mile the fletcher travels.)

ii)       How many miles of traveling is required if you pay the fletcher with a bank note?

iii)     Which is better (i) or (ii)?

iv)     As a result of (iii), what happens to the number of withdrawals from Goldmsmith A’s bank?

b)      Now assume that you use Goldsmith A to store all of your gold and the fletcher uses Goldsmith B to store all of his gold. Assume that you must start and end in your homestead, and that every shopkeeper starts and ends in his shop. Also assume that any gold the fletcher gets he will want to convert into a bank note.

i)        (1/4 a point) How many miles of traveling is required if you pay the fletcher in gold?

ii)       (1/4 a point) How many miles of traveling is required if you pay the fletcher with a bank note from Goldsmith B?

iii)     Extra Credit (1/2 a point): Suppose now that you pay with a banknote from Goldsmith A. Normally this would be less efficient than the result in part (i), however Goldsmiths A and B have n transactions to do, so their transportation cost between themselves is counted as 1/n^th that of you and the fletcher. They are distrustful of you and the fletcher, so will not let you complete their transactions for them. How many transactions are required for your paying with a banknote from Goldsmith A to be more efficient than paying with gold (i.e. less transaction cost than (i))?

c)      (1/2 a point) As a result of (a) and (b), what happens to the number of withdrawals from the goldsmiths’ banks (i.e. does it shrink or grow)? How could the goldsmiths take advantage of this?