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7310 The Monetary System
The Monetary System 7311
70. During the early 1930s there were a number of bank failures in the United States. What did this do
to the money supply? The New York Federal Reserve Bank advocated open market purchases.
Would these purchases have reversed the change in the money supply and helped banks? Explain.
Problems
1. What does the “double coincidence of wants” refer to?
7312 The Monetary System
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?
The Monetary System 7313
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?
7314 The Monetary System
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.
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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?”
7316 The Monetary System
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 .
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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.
7318 The Monetary System
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?”
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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?
7320 The Monetary System
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?
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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 $ .
7322 The Monetary System
31.
First National Bank
Assets
Liabilities
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?
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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.
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).
7324 The Monetary System
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.
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39. When the Fed purchases government bonds the money supply and the
federal funds rate .
40. What is the change in the money supply when the Fed purchases $700 worth of bonds and the
required reserve ratio is 14 percent assuming banks hold no excess reserves?
41. Discuss why the Fed rarely changes the reserve requirements.
7326 The Monetary System
42. The interest rate charged by the Fed to member banks is called the .
43. Trace the effects on the money supply when the Fed decreases the discount rate.
44. What is the Term Auction Facility?
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45. Name three actions the Fed can take to increase the money supply.
46. List two reasons why the Fed cannot control the exact size of the money supply.
47. Describe the role of the Federal Deposit Insurance Corporation (FDIC).
7328 The Monetary System
48. The is the interest rate at which banks make overnight loans to other banks.
49. When the federal funds rate is below the target rate, the Fed will bonds.
This action will the money supply.
50. The Fed began paying interest on reserves in October 2008. Holding all else constant, what effect
would this have on the money supply?
