ECON104 Macroeconomics Analysis (Homework Ch 16)

ECON104 Macroeconomics Analysis (Homework Ch 16)
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  1. The roles of money

Dmitri has saved $30 per week to buy a new Blu-Ray player. He compares two different models: a Panaview that is priced at $130 and a Zony model that is priced at $140. Dmitri decides to purchase the Zony Blu-Ray player for $140.

Identify what role money plays in each of the following parts of the story.

Hint: Select each role only once.

Role of MoneyMedium of ExchangeUnit of AccountStore of Value
Dmitri saved $30 per week.
Dmitri pays $140 for the Blu-Ray player.
Dmitri can easily determine that the Panaview model has a lower price than the Zony model.

 

  1. Liquidity

Consider the relative liquidity of the following assets:

Assets

1.A bond issued by a publicly traded company
2.A $5 bill
3.The funds in a savings account
4.A boat you own

Select the assets in order of their liquidity, from most liquid to least liquid.

Asset
Most Liquid__________   
Second-Most Liquid__________   
Third-Most Liquid__________   
Least Liquid__________   

 

  1. The kinds of money

Suppose a period of continuous political instability leads people to believe that the economy will slide into a deep recession. As a result, people become more likely to accept _______ money in exchange for goods and services.

U.S. dollars are an example of _______ money.

  1. Money aggregates

Identify whether each of the following examples belongs in M1 or M2. If an example belongs in both, be sure to check both boxes.

ExampleM1M2
Yvette has $7,000 in a two-year certificate of deposit (CD).
Musashi has a roll of quarters that he just withdrew from the bank to do laundry.
Sean has $30,000 in a money market account.

 

  1. The Federal Reserve’s organization

While all members of the Federal Reserve Board of Governors vote at Federal Open Market Committee (FOMC) meetings, only ______ of the regional bank presidents are members of the FOMC.

The Federal Reserve’s role as a lender of last resort involves lending to which of the following financially troubled institutions?

U.S. state governments when they run short on tax revenues

Governments in developing countries during currency crises

U.S. banks that cannot borrow elsewhere

The Federal Reserve’s primary tool for changing the money supply is _____. In order to decrease the number of dollars in the U.S. economy (the money supply), the Federal Reserve will ______ government bonds.

  1. Required and excess reserves

Suppose that Second Republic Bank currently has $150,000 in demand deposits and $97,500 in outstanding loans. The Federal Reserve has set the reserve requirement at 10%.

Second Republic
ReservesRequired ReservesExcess Reserves
(Dollars)(Dollars)(Dollars)

 

  1. The money creation process

Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 20%. Kevin, a client of First Main Street Bank, deposits $1,500,000 into his checking account at First Main Street Bank.

Complete the following table to reflect any changes in First Main Street Bank’s T-account (before the bank makes any new loans).

AssetsLiabilities
            

Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 20%.

Hint: If the change is negative, be sure to enter the value as negative number.

Amount DepositedChange in Excess ReservesChange in Required Reserves
(Dollars)(Dollars)(Dollars)
1,500,000 

Now, suppose First Main Street Bank loans out all of its new excess reserves to Hilary, who immediately uses the funds to write a check to Edison. Edison deposits the funds immediately into his checking account at Second Republic Bank. Then Second Republic Bank lends out all of its new excess reserves to Rajiv, who writes a check to Maria, who deposits the money into her account at Third Fidelity Bank. Third Fidelity lends out all of its new excess reserves to Simone in turn.

Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter each answer to the nearest dollar.

Increase in DepositsIncrease in Required ReservesIncrease in Loans
(Dollars)(Dollars)(Dollars)
First Main Street Bank
Second Republic Bank
Third Fidelity Bank

Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $1,500,000 injection into the money supply results in an overall increase of ______ in demand deposits.

  1. The reserve requirement, open market operations, and the moneysupply

Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. To simplify the analysis, suppose the banking system has total reserves of $100. Determine the money multiplier and the money supply for each reserve requirement listed in the following table.

Reserve Requirement

(Percent)

Simple Money MultiplierMoney Supply

(Dollars)

15    
10      

A lower reserve requirement is associated with a _____ money supply.

Suppose the Federal Reserve wants to increase the money supply by $100. Again, you can assume that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to ______ worth of U.S. government bonds.

Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions. Specifically, banks increase the percentage of deposits held as reserves from 10% to 20%. This increase in the reserve ratio causes the money multiplier to ______ to ______. Under these conditions, the Fed would need to _____ worth of U.S. government bonds in order to increase the money supply by $100.

Which of the following statements help to explain why, in the real world, the Fed cannot precisely control the money supply? Check all that apply.

The Fed cannot control whether and to what extent banks hold excess reserves.

The Fed cannot prevent banks from lending out required reserves.

The Fed cannot control the amount of money that households choose to hold as currency.

 

  1. Bank leverage

Use the information presented in Northeastern Mutual Bank’s balance sheet to answer the following questions.

Bank’s Balance Sheet
AssetsLiabilities and Owners’ Equity
Reserves$150Deposits$1,200
Loans$600Debt$200
Securities$750Capital (owners’ equity)$100

Suppose a new customer adds $100 to his account at Northeastern Mutual Bank, which the owners of the bank then use to make $100 worth of new loans. This would increase the loans account and _____ the _____ account.

This would also bring the leverage ratio from its initial value of ______ to a new value of    .

Which of the following is true of the capital requirement? Check all that apply.

The amount of capital required depends on the type of assets the bank holds.

It specifies a minimum leverage ratio for all banks.

Its intended goal is to protect the interests of those who hold equity in the bank.

 

  1. The discount rate and the federal funds rate

The discount rate is the interest rate on loans that the Federal Reserve makes to banks. Banks occasionally borrow from the Federal Reserve when they find themselves short on reserves. A lower discount rate ______ banks’ incentives to borrow reserves from the Federal Reserve, thereby ______ the quantity of reserves in the banking system and causing the money supply to    .

The federal funds rate is the interest rate that banks charge one another for short-term (typically overnight) loans. When the Federal Reserve uses open-market operations to sell government bonds, the quantity of reserves in the banking system ______, banks’ need to borrow from each other _______, and the federal funds rate    .

 

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