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SOLUTIONS TO TEXT PROBLEMS:
Quick Quizzes
1. The three functions of money are: (1) medium of exchange; (2) unit of account;
2. The primary responsibilities of the Federal Reserve are to regulate banks, to
3. Banks create money when they hold a fraction of their deposits in reserve and
lend out the remainder. If the Fed wanted to use all of its tools to decrease the
Chapter Quick Quiz
1. c
Questions for Review
1. Money is di-erent from other assets in the economy because it is the most liquid
2. Commodity money is money with intrinsic value, like gold, which can be used for
3. Demand deposits are balances in bank accounts that depositors can access on
4. The Federal Open Market Committee (FOMC) is responsible for setting monetary
468
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 29/The Monetary System ❖ 469
5. If the Fed wants to increase the supply of money with open-market operations, it
6. Banks do not hold 100% reserves because it is more pro0table to use the
reserves to make loans, which earn interest, instead of leaving the money as
7. Bank B will show a larger change in bank capital. The decrease in assets will
8. The discount rate is the interest rate on loans that the Federal Reserve makes to
9. Reserve requirements are regulations on the minimum amount of reserves that
10. The Fed cannot control the money supply perfectly because: (1) the Fed does not
Problems and Applications
1. a. A U.S. penny is considered money in the U.S. economy because it is used as a
b. A Mexican peso is not considered money in the U.S. economy, because it is
c. A Picasso painting is not considered money, because you cannot exchange it
d. A plastic credit card is similar to money, but represents deferred payment
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 29/The Monetary System ❖ 470
2. a. When the Fed buys bonds in open market operations, the money supply
b. When the Fed reduces the reserve requirement, the money supply increases.
c. When the Fed increases the interest rate it pays on reserves, the money
d. When Citibank repays a loan from the Fed, the money supply decreases.
e. When people decide to hold less currency, they likely deposit their currency in
f. When bankers decide to hold more excess reserves, the money supply
g. When the FOMC increases its target for the federal funds rate, the money
3. When your uncle repays a $100 loan from Tenth National Bank (TNB) by writing a
check from his TNB checking account, the result is a change in the assets and
liabilities of both your uncle and TNB, as shown in these T-accounts:
Your Uncle
Assets Liabilities
Before:
After:
Tenth National Bank
Assets Liabilities
Before:
After:
4. a. Here is BSB's T-account:
Beleaguered State Bank
Assets Liabilities
million
b. When BSB's largest depositor withdraws $10 million in cash and BSB reduces
its loans outstanding to maintain the same reserve ratio, its T-account is now:
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 29/The Monetary System ❖ 471
Beleaguered State Bank
Assets Liabilities
c. Because BSB is cutting back on its loans, other banks will 0nd themselves
short of reserves and they may also cut back on their loans as well.
d. BSB may 0nd it diIcult to cut back on its loans immediately, because it
5. If you take $100 that you held as currency and put it into the banking system,
6. a.
Happy Bank
Assets Liabilities
b. The leverage ratio = $1,000/$200 = 5.
c.
Happy Bank
Assets Liabilities
d. Assets decline by 9%. The bank's capital declines by 45%. The reduction in
7. With a required reserve ratio of 10%, the money multiplier could be as high as
8. The money supply will expand more if the Fed buys $2,000 worth of bonds. Both
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 29/The Monetary System ❖ 472
9. a. With a required reserve ratio of 10% and no excess reserves, the money
b. Banks might wish to hold excess reserves if they need to hold the reserves for
10. a. With banks holding only required reserves of 10%, the money multiplier is
b. If the required reserve ratio is raised to 20%, the money multiplier declines to
11. a. To expand the money supply, the Fed should buy bonds.
b. With a reserve requirement of 20%, the money multiplier is 1/0.20 = 5.
12. a. If people hold all money as currency, the quantity of money is $2,000.
b. If people hold all money as demand deposits at banks with 100% reserves, the
c. If people have $1,000 in currency and $1,000 in demand deposits, the
e. If people hold equal amounts of currency (C) and demand deposits (D) and the
money multiplier for reserves is 10, then two equations must be satis0ed:
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
