Chapter 20 – Money, Financial Institutions, and the Federal Reserve
20-84
Currencies:
13. Dollar—e (New Zealand)
22. Kronor—a (Sweden)
True or False
23. A retailer is required by law to accept any U.S. coins in payment for goods.
False. There is no federal law that mandates that a person must accept currency or coins as pay-
ment for goods or services not yet provided. For example, a bus line may prohibit payment of fares in
24. U.S. dollars are backed by the country’s gold and silver assets.
False. In the past, the U.S. Treasury issued notes backed by precious metals. You can still occa-
25. U.S. quarters and dimes have no silver content.
26. The U.S. government plans to recall all currency and replace it with the newly designed currency.
27. It costs the U.S. Mint more than 1cent to mint a penny.
28. The $1 bill makes up 20% of the currency printed by the U.S. Mint.
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
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Name: ___________________________
Date: ___________________________
critical thinking exercise 20-3
CURRENCY TRADING
Currencies of various nations are valued by the market in relation to other currencies. The rates
are available daily in The Wall Street Journal (in the “Currency Markets” chart in the “Money and Invest-
ing” section). They are also available on many websites, such as the Universal Currency Converter
(www.xe.com/ucc) ,viii CNNMoney (http://money.cnn.com/markets/currencies/), or Yahoo Finance
(www.finance.yahoo.com). (Sometimes the Web address for a location changes. You might need to
search to find the exact location mentioned.) Using one of these sources, determine the following:
1. What is the value in United Kingdom pounds of 100 U.S. dollars?
2. How many Canadian dollars will 20 U.S. dollars buy?
3. What is the value in euros of 100 United Kingdom pounds?
4. How many euros will 1,000 Japanese yen buy?
5. What is the value in Mexican pesos of 100 Canadian dollars?
6. How many Japanese yen will 500 United Kingdom pounds buy?
7. How many U.S. dollars would it take to buy $1,000 in Canadian dollars?
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
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Name: ___________________________
Date: ___________________________
critical thinking exercise 20-4
RESEARCHING THE FEDERAL RESERVE’S TOOLS
The purpose of this exercise is to encourage students to find up–to-date information about the
money management tools used by the Federal Reserve System. The information can be obtained by visit-
ing the Federal Reserve Board website at www.federalreserve.gov.ix (Sometimes the Web address for a
location changes. You might need to search to find the exact location mentioned.)
1. What is the current federal funds percentage rate? How has this rate changed in the past year?
2. What is the current reserve requirement for banks? Is the reserve requirement the same for all
banks (“depository institutions”)?
3. What is the primary concern of the Fed Open Market Committee now—inflation or recession?
4. Look back at the Open Market Committee actions for previous years. Compare the actions of the
Federal Reserve today with those two years ago. How has the emphasis changed?
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
bonus
cases
bonus case 20-1
WHEN MONEY LOSES ITS MEANING
When money decreases in value because of inflation, people tend to place less trust in it as a
method of storing value, and look for alternative means of storing their wealth that would be more effi-
cient. Hyperinflation—extremely high inflation that can range from 100 to 10,000% annually—makes
money particularly unstable. In fact, hyperinflation makes money meaningless. That is what happened in
Germany during the 1920s. A pack of cigarettes, for example, had a price tag of 200 trillion marks. As a
result, people ceased to use the official, but worthless, currency and resorted to using other objects as
money (such as clothes, appliances, jewelry, antiques, diamonds, silver, and gold). These objects effec-
tively became money. Subsequently, the German economy collapsed, setting the stage for the rise of Na-
zism.
Hyperinflation in post–World War I Germany is one of the worst such cases in this century. Nev-
ertheless, there are numerous recent examples of hyperinflation. In the South American country of Boliv-
ia, for example, prices during 1984 rose at an annual rate of 10,000%. A hamburger cost 1 million pesos,
a loaf of bread sold for 300,000 pesos, and one night’s lodging in a good hotel cost 35 million pesos. Hy-
perinflation in Bolivia skyrocketed to the point where the peso was virtually worthless.
The most severe known incident of inflation was in Hungary after the end of World War II when
prices rose at a rate of 4.19 x 1016.% per month (prices doubled every 15 hours). More recently, Yugosla-
via suffered 5 x 1015% inflation per month (prices doubled every 16 hours) between October 1993 and
January 1994.
discussion questions for bonus case 20-1
1. Why did official money lose its meaning in Germany during the 1920s?
2. Do you believe that the United States could be facing a hyperinflation problem in the foreseeable
future? Why or why not?
3. How can we deal with hyperinflation? What is the role of the Federal Reserve in controlling infla-
tion? How does it perform this function?
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
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notes on discussion questions for bonus case 20-1
1. Why did official money lose its meaning in Germany during the 1920s?
When a government gets into financial trouble, one of the ways to finance those problems is
through inflation. If the government owes people money, that debt is lessened considerably if money is
2. Do you believe that the United States could be facing a hyperinflation problem in the foreseeable
future? Why or why not?
The economy of the United States steadily grew throughout the early 2000s, and inflation was
down from double-digit levels of a decade ago. Many felt that inflation was under control. But by early
3. How can we deal with hyperinflation? What is the role of the Federal Reserve in controlling in-
flation? How does it perform this function?
The Fed has three tools for managing the money supply: (1) reserve requirements, which keep
money out of circulation; (2) open-market operations that manage the money supply by the purchase and
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
bonus case 20-2
REFORMING WALL STREET
Though the United States has certainly learned its share of lessons from the economic meltdown
of 2008, the financial institutions that helped cause it remain largely intact and unrestrained. For legisla-
tors in Washington, writing regulations to prevent another widespread collapse is a slippery slope. For
instance, Democratic leaders in the House and Senate called for a consumer protection agency to serve as
a watchdog over Wall Street’s biggest banks. As with every political issue, the idea is not universally
supported. Opposition from Republicans and disagreement over the autonomy of the agency has delayed
its implementation for the time being.
Ideally, the consumer protection agency would act like the FDIC: If a bank goes belly up, it won’t
take its customer base or the whole financial system down with it. Regulators are searching for an elusive
middle ground that would allow an ailing bank to fail smoothly without causing a Lehman Brothers–level
panic or another controversial bailout. The Senate’s version of the financial regulation bill includes provi-
sions that would make banks easier to break apart should they fail. But the crux of the bill lies in the con-
sumer protection agency, which would help prevent banks from failing in the first place by keeping a
close eye on them.
Nevertheless, the United States is a free market that needs healthy financial institutions to support
a stable economy. Too much oversight on banks’ lending practices could hamper their day–to-day opera-
tions. Still, it’s hard to forget that the reason why the Great Recession has been so severe is because of the
toxic assets banks bundled together and pushed around to each other. It’s true that banks aren’t solely re-
sponsible for the economic collapse: foreclosures by debt-ridden consumers triggered the initial panic.
But perhaps the whole ordeal could have been avoided if something had prevented banks from offering
such bad loans in the first place. In the end, the leverage of banks to deal in debt so freely played a major
role in the financial meltdown. Simple solutions like raising reserve requirements wouldn’t work due to
the adverse effect they’d have on recovering businesses. A more sweeping change is needed, and hopeful-
ly it will come in the form of sound and fair reform.x
discussion questions for bonus case 20-2
1. Would banking reform threaten the U.S. free-market economy?
2. Do we really need reform in the banking industry?
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
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notes on discussion questions for bonus case 20-2
1. Would banking reform threaten the U.S. free-market economy?
It’s doubtful the U.S. free-market economy would be in jeopardy. The passage of legislation and
2. Do you believe that the United States could be facing a hyperinflation problem in the foreseeable
future? Why or why not?
Ask 10 economists and you would likely get 10 different answers. However, what most analysts,
Chapter 20 – Money, Financial Institutions, and the Federal Reserve
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endnotes