Subjective Short Answer
1. What does the “double coincidence of wants” refer to?
2. The existence of money makes trade easier. How is it that money can also increase the standard of living?
3. The ease with which an asset can be converted into the economy’s medium of exchange is known as _____.
4. What are the functions of money?
5. You believe the dollars you have today will be accepted in the future in exchange for goods and services. Which
function of money does this illustrate?
6. The prices of goods at a grocery store are listed in dollars. Which function of money does this illustrate?
7. One of the features of money is its store of value. However, most people do not hold their wealth as currency. Given
that currency is the most liquid type of asset, why don’t people hold all their wealth as currency?
8. Money, such as gold, with some intrinsic value is called _____. Money with no intrinsic value is called _____.
9. List two examples of commodity money.
10. In many circumstances, prisoners are not allowed to possess cash. Does this mean there is no money in prison?
Explain.
11. If you withdraw $500 from your savings account and deposit it in your checking account, then M1 will change by
_____ and M2 will change by _____.
12. List the two main functions performed by the Fed?
13. What does it mean for the Fed to be the “lender of last resort?”
14. How are Federal Reserve Board Governors selected?
15. Why do Federal Reserve Board of Governors have long (14 year) terms?
16. Monetary policy is made by the ______.
17. Why is the president of the New York Fed always a voting member of the FOMC?
18. How does the Fed Open Market Committee increase the money supply?
19. The Fed ____ bonds when it conducts an open-market purchase. This action _____ the money supply.
20. The primary tool used by the Federal Reserve to change the money supply is _____.
21. Monetary policy has an important influence on _____ and _____ in the short run.
22. Why is the Chairman of the Federal Reserve often referred to as the “second most powerful person in the United
States?”
23. What is the change in the money supply when the Fed purchases $100 worth of bonds in a 100-percent-reserve
banking system?
24. The fractional reserve characteristic of the banking system allows banks to create money and also create wealth from
bank deposits. Describe why this statement is or is not true.
25. A bank has $30,000 in deposits and has $5,400 in reserves. What is its reserve ratio?
26. In a fractional reserve economy where the required reserve ratio is 10%, must it be the case that an initial deposit of
$100 increases the total money supply by $1,000? Explain.
27. The money multiplier is _____ when the reserve ratio is 12.5 percent.
28. Suppose a bank has $3,000 in reserves, $25,000 of deposits, and a 10 percent reserve requirement. What is the amount
of excess reserves?
29. Suppose the required reserve ratio is 20%. What is the maximum amount of total money supply that can be created
from an initial deposit of $200? In general, why might the actual amount of total money creation be less than the
maximum?
30. A bank has $1000 in deposits and maintains a 12 percent reserve ratio. Its reserves are $_____.
31.
First National Bank
Assets
Reserves $1,200
Deposits $10,000
Loans 8,800
The reserve ratio for this bank is _____. If the required reserve ratio is 10 percent, then this bank has excess reserves of
_____.
32. Suppose a bank purchases $50 of government securities using funds from reserves. How much do bank assets change
as a result of this transaction?
33. A bank operates with reserves of $100, loans of $300 and securities of $100. The bank’s only liability is deposits of
$400 since it has zero debt. Calculate the bank’s leverage ratio.
The bank leverage in this example is 5.
34. Describe how the use of leverage affects the impact of bank investments.
35. When banks decide to increase their reserves, the money supply will _____ (holding all else constant).
36. Suppose a bank is operating with a leverage ratio of 20. What is the maximum decrease in the market value of assets
before the bank becomes insolvent?
37. What is bank insolvancy?
38. Describe the role of bank leverage in bank insolvency during times of falling asset prices.
39. When the Fed purchases government bonds the money supply _____ and the federal funds rate _____.