# chapter: Solution Money, Banking, and the Federal Reserve System

Size: px
Start display at page:

Transcription

2 S-188 MACROECONOMICS, CHAPTER 14 ECONOMICS, CHAPTER a. A bottle of rum is commodity money since the rum has other uses. b. Salt is commodity money since it has other uses. c. The Rye Mark is commodity-backed money since its ultimate value is guaranteed by a promise that it can be converted into valuable goods (rye grain). d. Ithaca HOURS are fiat money because their value derives entirely from their status as a means of payment in Ithaca. 3. The table below shows the components of M1 and M2 in billions of dollars for the month of December in the years 1998 to 2007 as published in the 2008 Economic Report of the President. Complete the table by calculating M1, M2, currency in circulation as a percentage of M1, and currency in circulation as a percentage of M2. What trends or patterns about M1, M2, currency in circulation as a percentage of M1, and currency in circulation as a percentage of M2 do you see? What might account for these trends? Currency Currency Time in in deposits circulation circulation Currency Money smaller as a as a in Traveler s Checkable market than Savings percentage percentage Year circulation checks deposits funds \$100,000 deposits M1 M2 of M1 of M2 (billions of dollars) 1998 \$460.5 \$8.5 \$626.5 \$728.9 \$952.4 \$1,605.0???? ,740.3???? , ,878.8???? ,312.8???? ,778.2???? ,169.1???? ,518.3???? ,621.4???? , ,698.6???? , ,889.8???? Source: 2008 Economic Report of the President. 3. In the completed table that follows, M1 consists of currency in circulation, traveler s checks, and checkable deposits. M2 consists of M1 plus money market funds, time deposits, and savings deposits. From 1998 to 2007, there is no obvious trend in M1. Over the entire period, M1 grew by \$269 billion (or 25%) but was essentially stable from 2004 to 2007; all of this growth occurred between 1998 and There is, however, a clear upward trend throughout the period for M2, which grew by \$3,065 billion (or 70%) from 1998 to Currency as a percentage of M1 grew from 42.0% to over 55% from 1998 to 2007, but currency as a percentage of M2 remained relatively constant, varying from a low of 10.2% in 2007 to a high of 11.2% in The increase in currency as a percentage of M1 could reflect increased use of credit cards, with a corresponding reduction in the importance of traveler s checks and checkable deposits. Yet, since currency as a percentage of M2 did not change, it could also reflect a shift from checkable deposits to money market funds, time deposits, and savings deposits.

4 S-190 MACROECONOMICS, CHAPTER 14 ECONOMICS, CHAPTER 30 c. If every time the bank makes a loan, the loan results in a new checkable bank deposit in a different bank equal to the amount of the loan, by how much could the total money supply in the economy expand in response to Tracy s initial cash deposit of \$500? d. If every time the bank makes a loan, the loan results in a new checkable bank deposit in a different bank equal to the amount of the loan and the bank maintains a reserve ratio of 5%, by how much could the money supply expand in response to an initial cash deposit of \$500? 5. a. Initially, the bank s reserves rise by \$500, as do its checkable deposits. There is no initial change in the money supply; currency in circulation has fallen by \$500 but checkable deposits have increased by \$500. Reserves +\$500 Checkable Deposits +\$500 b. The bank will hold \$50 as reserves against the new deposit and make additional loans equal to \$450. c. The money supply can expand by \$4,500. When Tracy deposits \$500, the bank now holds \$450 in excess reserves. This will ultimately lead to an increase in the money supply of \$450/0.1 = \$4,500. d. The money supply can expand by \$9,500. When Tracy deposts \$500, the bank now holds \$475 in excess reserves. This will ultimately increase the money supply by \$475/0.05 = \$9, Ryan Cozzens withdraws \$400 from his checking account at the local bank and keeps it in his wallet. a. How will the withdrawal change the T-account of the local bank and the money supply? b. If the bank maintains a reserve ratio of 10%, how will the bank respond to the withdrawal? Assume that the bank responds to insufficient reserves by reducing the amount of deposits it holds until its level of reserves satisfies its required reserve ratio. The bank reduces its deposits by calling in some of its loans, forcing borrowers to pay back these loans by taking cash from their checking deposits (at the same bank) to make repayment. c. If every time the bank decreases its loans, checkable bank deposits fall by the amount of the loan, by how much will the money supply in the economy contract in response to Ryan s withdrawal of \$400? d. If every time the bank decreases its loans, checkable bank deposits fall by the amount of the loan and the bank maintains a reserve ratio of 20%, by how much will the money supply contract in response to a withdrawal of \$400? 6. a. Initially, the bank s reserves fall by \$400, as do its checkable deposits. There is no initial change in the money supply; currency in circulation has risen by \$400 but checkable deposits have decreased by \$400. Reserves \$400 Checkable Deposits \$400

5 MONEY, BANKING, AND THE FEDERAL RESERVE SYSTEM S-191 b. Assuming that the bank has other checkable deposits, the bank will be holding insufficient reserves. The bank was holding \$40 of the \$400 withdrawal as required reserves for the \$400 deposit; however, the remaining \$360 was being held as required reserves for other deposits. The bank will have to reduce its deposits by \$3,600 (\$360/0.1) to reduce its required reserves by \$360 (10% of \$3,600) in order to maintain the required reserve ratio of 10%. c. The money supply will contract by \$3,600 ( \$400/0.1 + \$400). Checkable deposits fall by \$4,000, but only \$3,600 represents a decrease in the money supply because \$400 of the \$4,000 fall in checkable deposits has been converted into cash in Ryan s wallet. d. The money supply can decrease by \$1,600 ( \$400/0.2 + \$400). Checkable deposits fall by \$2,000, but only \$1,600 represents a decrease in the money supply. 7. The government of Eastlandia uses measures of monetary aggregates similar to those used by the United States, and the central bank of Eastlandia imposes a required reserve ratio of 10%. Given the following information, answer the questions below. Bank deposits at the central bank = \$200 million Currency held by public = \$150 million Currency in bank vaults = \$100 million Checkable bank deposits = \$500 million Traveler s checks = \$10 million a. What is M1? b. What is the monetary base? c. Are the commercial banks holding excess reserves? d. Can the commercial banks increase checkable bank deposits? If yes, by how much can checkable bank deposits increase? 7. a. M1 equals the sum of currency held by the public (\$150 million), checkable deposits (\$500 million), and traveler s checks (\$10 million), or \$660 million. b. The monetary base is the sum of currency held by the public (\$150 million) and the reserves of the commercial banks [currency in bank vaults (\$100 million) and bank deposits at the central bank (\$200 million)]. The monetary base is \$450 million. c. Required reserves are \$50 million (10% of \$500 million). Because total reserves are \$300 million [currency in bank vaults (\$100 million) plus bank deposits at the central bank (\$200 million)], the commercial banks are holding \$250 million (\$300 million \$50 million) in excess reserves. d. Since the commercial banks are holding excess reserves, they can increase deposits. With a required reserve ratio of 10%, reserves of \$300 million can support a total of \$3,000 million (\$300/0.1) in deposits. Commercial banks can increase deposits by an additional \$2,500 million.

6 S-192 MACROECONOMICS, CHAPTER 14 ECONOMICS, CHAPTER In Westlandia, the public holds 50% of M1 in the form of currency, and the required reserve ratio is 20%. Estimate how much the money supply will increase in response to a new cash deposit of \$500 by completing the accompanying table. (Hint: The first row shows that the bank must hold \$100 in minimum reserves 20% of the \$500 deposit against this deposit, leaving \$400 in excess reserves that can be loaned out. However, since the public wants to hold 50% of the loan in currency, only \$ = \$200 of the loan will be deposited in round 2 from the loan granted in round 1.) How does your answer compare to an economy in which the total amount of the loan is deposited in the banking system and the public doesn t hold any of the loan in currency? What does this imply about the relationship between the public s desire for holding currency and the money multiplier? Required Excess Held as Round Deposits reserves reserves Loans currency 1 \$ \$ \$ \$ \$ ???? 3????? 4????? 5????? 6????? 7????? 8????? 9????? 10????? Total after 10 rounds????? 8. As shown in the accompanying table, after 10 rounds, loans can expand by \$666.60; this is also the increase in the money supply at this point. (Although deposits increase by \$833.25, currency held by the public falls by \$ it initially fell by \$500 and eventually rose again by \$ ) If the total amount of each loan is deposited in the banking system (that is, the public does not hold any of the loans in currency), the money supply would increase by \$2,000 (\$500/0.2 \$500); deposits would increase by \$2,500. The money multiplier decreases in size as the public holds a greater percentage of loans in currency. Required Excess Held as Round Deposits reserves reserves Loans currency 1 \$ \$ \$ \$ \$ Total after 10 rounds \$ \$ \$ \$ \$333.30

7 MONEY, BANKING, AND THE FEDERAL RESERVE SYSTEM S What will happen to the money supply under the following circumstances in a checkable-deposits-only system? a. The required reserve ratio is 25%, and a depositor withdraws \$700 from his checkable bank deposit. b. The required reserve ratio is 5%, and a depositor withdraws \$700 from his checkable bank deposit. c. The required reserve ratio is 20%, and a customer deposits \$750 to her checkable bank deposit. d. The required reserve ratio is 10%, and a customer deposits \$600 to her checkable bank deposit. 9. a. Checkable deposits contract by \$2,800, but \$700 is converted into currency held by the public. The money supply contracts by \$2,100. b. Checkable deposits contract by \$14,000, but \$700 is converted into currency held by the public. The money supply contracts by \$13,300. c. Checkable deposits expand by \$3,750, but currency in circulation falls by \$750. The money supply expands by \$3,000. d. Checkable deposits expand by \$6,000, but currency in circulation falls by \$600. The money supply expands by \$5, Although the U.S. Federal Reserve doesn t use changes in reserve requirements to manage the money supply, the central bank of Albernia does. The commercial banks of Albernia have \$100 million in reserves and \$1,000 million in checkable deposits; the initial required reserve ratio is 10%. The commercial banks follow a policy of holding no excess reserves. The public holds no currency, only checkable deposits in the banking system. a. How will the money supply change if the required reserve ratio falls to 5%? b. How will the money supply change if the required reserve ratio rises to 25%? 10. a. If the required reserve ratio falls to 5%, the commercial banks of Albernia will be holding \$50 million in excess reserves. Since the banks follow a policy of holding no excess reserves, the banks will expand deposits by making loans. The banks reserves of \$100 million will support \$2,000 million in deposits at a reserve ratio of 5%. The bank will expand loans and deposits by \$1,000 million; so the money supply expands by \$1,000 million. b. If the required reserve ratio rises to 25%, the commercial banks of Albernia will not be holding enough reserves to support \$1,000 million in deposits. The banks reserves will only support \$400 million in deposits. The commercial banks will have to decrease loans and deposits by \$600 million; so the money supply will contract by \$600 million. 11. Using Figure 30-6, find the Federal Reserve district in which you live. Go to and click on your district to identify the president of the Federal Reserve Bank in your district. Go to reserve.gov/fomc/ and determine if the president of the Fed is currently a voting member of the Federal Open Market Committee (FOMC).

8 S-194 MACROECONOMICS, CHAPTER 14 ECONOMICS, CHAPTER Answers will vary depending on where you live and when you look up your answer. If you live in Reedley, California, in September 2008, you were in the San Francisco district of the Federal Reserve system. Janet Yellen was the president of the Federal Reserve Bank of San Francisco and an alternate (nonvoting) member of the FOMC at that time. 12. Show the changes to the T-accounts for the Federal Reserve and for commercial banks when the Federal Reserve buys \$50 million in U.S. Treasury bills. If the public holds a fixed amount of currency (so that all loans create an equal amount of deposits in the banking system), the minimum reserve ratio is 10%, and banks hold no excess reserves, by how much will deposits in the commercial banks change? By how much will the money supply change? Show the final changes to the T-account for commercial banks when the money supply changes by this amount. 12. When the Federal Reserve buys \$50 million in Treasury bills from commercial banks, its assets increase by \$50 million (it now owns \$50 million in Treasury bills) but its liabilities also increase by \$50 million as it credits the banks accounts at the Federal Reserve, part of the monetary base. From the perspective of commercial banks, their assets fall by \$50 million because they sell Treasury bills to the Fed, but their assets also rise by \$50 million when their deposits at the Fed (reserves) are credited with \$50 million. Initial changes to the T-account of the Federal Reserve immediately after the Fed purchase of \$50 million in Treasury bills: Treasury bills +\$50 million Monetary base +\$50 million Initial changes to the T-account of commercial banks immediately after the Fed purchase of \$50 million in Treasury bills: Treasury bills \$50 million No change Reserves +\$50 million After the Federal Reserve buys \$50 million from commercial banks, the banks are holding \$50 million in excess reserves. Since the banks do not want to hold any excess reserves, they will increase loans and deposits by \$500 million, the maximum amount that \$50 million in reserves can support. Therefore, the money supply will also increase by \$500 million. Total changes to the T-account of commercial banks after the Fed purchase of \$50 million in Treasury bills: Treasury bills \$50 million Checkable deposits +\$500 million Reserves +\$50 million Loans +\$500 million 13. Show the changes to the T-accounts for the Federal Reserve and for commercial banks when the Federal Reserve sells \$30 million in U.S. Treasury bills. If the public holds a fixed amount of currency (so that all new loans create an equal amount of checkable bank deposits in the banking system) and the minimum reserve ratio is 5%, by how much will checkable bank deposits in the commercial banks change? By how much will the money supply change? Show the final changes to the T-account for the commercial banks when the money supply changes by this amount.

9 13. When the Federal Reserve sells \$30 million in Treasury bills to commercial banks, its assets decrease by \$30 million (it now owns \$30 million less in Treasury bills), but its liabilities also decrease by \$30 million as the banks pay the Federal Reserve for the Treasury bills from their accounts at the Fed (part of the monetary base). From the perspective of commercial banks, their assets rise by \$30 million because they buy the Treasury bills from the Fed, but their assets also fall by \$30 million when they pay for the Treasury bills from their deposits at the Fed (their reserves). Initial changes to the T-account of the Federal Reserve immediately after the Fed sale of \$30 million in Treasury bills: Treasury bills \$30 million Monetary base \$30 million MONEY, BANKING, AND THE FEDERAL RESERVE SYSTEM S-195 Initial changes to the T-account of commercial banks immediately after the Fed sale of \$30 million in Treasury bills: Treasury bills +\$30 million No change Reserves \$30 million After the Federal Reserve sells \$30 million in Treasury bills, the banks are no longer holding enough reserves to support their deposits. The banks will need to reduce loans and deposits by \$600 million the amount of deposits that were supported by the \$30 million in reserves used to buy the Treasury bills. So the money supply will also decrease by \$600 million. All changes to the T-account of commercial banks after the Fed sale of \$30 million in Treasury bills: Treasury bills +\$30 million Checkable deposits \$600 million Reserves \$30 million Loans \$600 million 14. The Congressional Research Service estimates that at least \$45 million of counterfeit U.S. \$100 notes produced by the North Korean government are in circulation. a. Why do U.S. taxpayers lose because of North Korea s counterfeiting? b. As of September 2008, the interest rate earned on one-year U.S. Treasury bills was 2.2%. At a 2.2% rate of interest, what is the amount of money U.S. taxpayers are losing per year because of these \$45 million in counterfeit notes? 14. a. When North Korea circulates fake currency, the Federal Reserve does not hold any assets, and the U.S. government does not get the interest from the Treasury bills it would have gotten if it had printed the notes. The cost of counterfeiting is the interest forgone on U.S. Treasury bills that the U.S. government would receive from legally printed \$100 notes. U.S. taxpayers lose because the government does not get this interest. b. The amount of interest forgone per year is 2.2% \$45 million = \$990,000.

10 S-196 MACROECONOMICS, CHAPTER 14 ECONOMICS, CHAPTER As shown in Figure 30-9, on September 5, 2007, about 90% of the Federal Reserve s assets were made up of U.S. Treasury bills. However, on September 3, 2008, only 53% of the Federal Reserve s assets were made up of U.S. Treasury bills. Go to Under Recent Statistical Releases, click on All Statistical Releases. Under the heading Money Stock and Reserve Balances, click on Factors Affecting Reserve Balances. Click on the date of the current release. a. Under 5. Statement of Condition of Each Federal Reserve Bank, look in the Total column. What is the amount displayed next to? What is the amount displayed next to U.S. Treasury? What percentage of the Federal Reserve s total assets are currently made up of U.S. Treasury bills? b. Do the Federal Reserve s assets consist primarily of U.S. Treasury securities, as on September 5, 2007, which was a fairly typical day, or does the Fed still own a large number of other assets, as it did on September 3, 2008, when it was responding to a crisis on Wall Street? 15. a. Answers will vary. As of data released on September 11, 2008, the Fed s assets were \$924,865 million, and U.S. Treasury holdings were \$479,782 million; 52% (479,782/924, ) of the Fed s total assets were made up of U.S. Treasury securities. b. As of September 11, 2008, the Federal Reserve still owned a large number of other assets, and the Fed s balance sheet had not yet returned to normal. 16. The accompanying figure shows new U.S. housing starts, in thousands of units per month, between January 1980 and September The graph shows a large drop in new housing starts in and New housing starts are related to the availability of mortgages. New housing starts (thousands) 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1, Source: Federal Reserve Bank of St. Louis. Year a. What caused the drop in new housing starts in ? b. What caused the drop in new housing starts in ? c. How could better regulation of financial institutions have prevented these two instances?

11 MONEY, BANKING, AND THE FEDERAL RESERVE SYSTEM S a. The drop in new housing starts in was caused by the unavailability of easy mortgage financing resulting from the Savings and Loans (S&L) crisis. S&Ls had invested in overly risky real estate assets, and many of them failed. As the government closed over 1,000 S&Ls, mortgages became less easily available, and new housing starts dropped dramatically. b. The drop in new housing starts in was caused by the unavailability of easy mortgage financing that precipitated the 2008 financial crisis. When many homeowners who had financed their homes at subprime lending rates defaulted on their mortgages, those financial institutions that had invested in securitized subprime loans got into financial trouble and restricted or stopped lending. c. Better regulation of the S&Ls could have prevented them from investing in risky real estate assets, preventing their collapse. Similarly, better regulation of financial institutions that purchased securitized subprime loans could have prevented those institutions from failing.

12

### chapter: Solution Money, Banking, and the Federal Reserve System

Money, Banking, and the Federal Reserve System 1. For each of the following transactions, what is the initial effect (increase or decrease) on M1? On M2? a. You sell a few shares of stock and put the proceeds

### Solution. Solution. Money, Banking, and the Federal Reserve System. macroeconomics. economics

KrugmanMacro_SM_Ch13.qxp 10/27/05 3:20 PM Page 155 Money, Banking, and the Federal Reserve System 1. For each of the following transactions, what is the effect (increase or decrease) on M1? on M2? a. You

### PRACTICE- Unit 6 AP Economics

PRACTICE- Unit 6 AP Economics Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The term liquid asset means: A. that the asset is used in a barter exchange.

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Survey of Macroeconomics, MBA 641 Fall 2006, Quiz 4 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The central bank for the United States

### Reference: Gregory Mankiw s Principles of Macroeconomics, 2 nd edition, Chapter 15. The Banking System and the Money Supply

Macroeconomics Topic 6: Explain how the Federal Reserve and the banking system create money (i.e., the supply of money) Explain the factors that affect the demand for money. Reference: Gregory Mankiw s

### THE MEANING OF MONEY. The Functions of Money. Money has three functions in the economy: The Functions of Money. The Functions of Money

In this chapter, look for the answers to these questions: What assets are considered money? What are the functions of money? The types of money? 11 What is the Federal Reserve? What role do banks play

### Describe the functions of the Federal Reserve System (the Fed).

The Monetary System Chapter CHAPTER CHECKLIST Define money and describe its functions. Money is any commodity or token that is generally accepted as a means of payment. Money serves as a medium of exchange,

### Chapter 13 Money and Banking

Chapter 13 Money and Banking Multiple Choice Questions Choose the one alternative that best completes the statement or answers the question. 1. The most important function of money is (a) as a store of

### Homework 5: The Monetary System and Inflation

Homework 5: The Monetary System and Inflation Solutions 1. Be sure to read your copy of the Wall Street Journal every weekday, looking especially for items related to the material in this course. Find

### 4. The minimum amount of owners' equity in a bank mandated by regulators is called a requirement. A) reserve B) margin C) liquidity D) capital

Chapter 4 - Sample Questions 1. Quantitative easing is most closely akin to: A) discount lending. B) open-market operations. C) fractional-reserve banking. D) capital requirements. 2. Money market mutual

### Currency: The paper money and coins owned by people and business firms

WHAT IS MONEY? Things acceptable as a means of payment 2 TYPES OF MONEY 1. COMMODITY MONIES: 2. FIAT MONIES (TOKEN MONIES): DECREED BY THE GOV T AS LEGAL TENDER. The gov t promises the public that will

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The government agency that oversees the banking system and is responsible for the conduct

### Macroeconomics, 8e (Parkin) Testbank 1

Macroeconomics, 8e (Parkin) Testbank 1 Chapter 9 Money, the Price Level, and Inflation 9.1 What is Money? 1) The functions of money are A) medium of exchange and the ability to buy goods and services.

### 4 Macroeconomics LESSON 4

4 Macroeconomics LESSN 4 The Federal Reserve System and Its Tools Introduction and Description The focus of this lesson is the Federal Reserve System: how its actions relate to the money creation process

### Chapter 13 Money and Banking

Chapter 13 Money and Banking After reading Chapter 13, MONEY AND BANKING, you should be able to: Explain the three functions of money: Medium of Exchange, Unit of Account, Store of Value. Understand the

### Lecture Notes on MONEY, BANKING, AND FINANCIAL MARKETS. Peter N. Ireland Department of Economics Boston College. irelandp@bc.edu

Lecture Notes on MONEY, BANKING, AND FINANCIAL MARKETS Peter N. Ireland Department of Economics Boston College irelandp@bc.edu http://www2.bc.edu/~irelandp/ec261.html Chapter 15a: Introduction to the Money

### Chapter 29: The Monetary System Principles of Economics, 7 th Edition N. Gregory Mankiw Page 1

Page 1 1. Introduction a. This is a fairly descriptive chapter, but it contains some important material for understanding the world that we live in. b. Money is important for facilitating trade. c. Paper

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Study Questions 5 (Money) MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The functions of money are 1) A) medium of exchange, unit of account,

### The Banking System and the Money Supply. 2003 South-Western/Thomson Learning

The Banking System and the Money Supply 2003 South-Western/Thomson Learning What Counts as Money MONEY Anything that is widely accepted as a means of payment What Counts as Money MONEY Anything that is

### Money: Definition. Money: Functions. Money: Types 2/13/2014. ECON 3010 Intermediate Macroeconomics

Money: Definition ECON 3010 Intermediate Macroeconomics Chapter 4 The Monetary System: What It Is and How It Works Money is the stock of assets that can be readily used to make transactions. Money: Functions

### University of Lethbridge Department of Economics ECON 1012 Introduction to Macroeconomics Instructor: Michael G. Lanyi

University of Lethbridge Department of Economics ECON 1012 Introduction to Macroeconomics Instructor: Michael G. Lanyi CH 24 Money Price Inflation 1) Money is A) currency plus coins. B) the same as gold.

### MACROECONOMICS. The Monetary System: What It Is and How It Works. N. Gregory Mankiw. PowerPoint Slides by Ron Cronovich

4 : What It Is and How It Works MACROECONOMICS N. Gregory Mankiw Modified for EC 204 by Bob Murphy PowerPoint Slides by Ron Cronovich 2013 Worth Publishers, all rights reserved IN THIS CHAPTER, YOU WILL

### Lecture Notes on MONEY, BANKING, AND FINANCIAL MARKETS. Peter N. Ireland Department of Economics Boston College. irelandp@bc.edu

Lecture Notes on MONEY, BANKING, AND FINANCIAL MARKETS Peter N. Ireland Department of Economics Boston College irelandp@bc.edu http://www2.bc.edu/~irelandp/ec261.html Chapter 9: Banking and the Management

### VISUAL 1 TERMS OF MODERN FINANCIAL MARKETS

VISUAL 1 TERMS OF MODERN FINANCIAL MARKETS Instruments Asset-backed security Credit default swap Bond Common stock Mortgage-backed security Mutual fund Option Futures contract Subprime mortgage Institutions

### Macroeconomics, 10e, Global Edition (Parkin) Chapter 25 Money, the Price Level, and Inflation. 1 What is Money?

Macroeconomics, 10e, Global Edition (Parkin) Chapter 25 Money, the Price Level, and Inflation 1 What is Money? 1) The functions of money are A) medium of exchange and the ability to buy goods and services.

### What three main functions do they have? Reducing transaction costs, reducing financial risk, providing liquidity

Unit 4 Test Review KEY Savings, Investment and the Financial System 1. What is a financial intermediary? Explain how each of the following fulfills that role: Financial Intermediary: Transforms funds into

### http://angel.bfwpub.com/section/content/default.asp?wci=pgt...

Hmwk 14 1. Let's find out what counts as money. In this chapter, we used a typical definition of money: A widely accepted means of payment. Under this definition, which people are using money in the following

### Chapter 14. The Money Supply Process

Chapter 14. The Money Supply Process C H A P T E R O B J E C T I V E S By the end of this chapter, students should be able to: 1. Describe who determines the money supply. 2. Explain how the central bank

### Chapter 11 Money and Monetary Policy Macroeconomics In Context (Goodwin, et al.)

Chapter 11 Money and Monetary Policy Macroeconomics In Context (Goodwin, et al.) Chapter Overview In this chapter, you will be introduced to a standard treatment of the banking system and monetary policy.

### Macroeconomics, Fall 2007 Exam 3, TTh classes, various versions

Name: _ Days/Times Class Meets: Today s Date: Macroeconomics, Fall 2007 Exam 3, TTh classes, various versions Read these Instructions carefully! You must follow them exactly! I) On your Scantron card you

### Homework (Chapter 11)

EC 2113 Principles of Macroeconomics Instructor: Erdenechimeg Eldev-Ochir Name:_ ID: Homework (Chapter 11) Multiple Choice Identify the letter of the choice that best completes the statement or answers

### Solution. Solution. Monetary Policy. macroeconomics. economics

KrugmanMacro_SM_Ch14.qxp 10/27/05 3:25 PM Page 165 Monetary Policy 1. Go to the FOMC page of the Federal Reserve Board s website (http://www. federalreserve.gov/fomc/) to find the statement issued after

### ECON 4110: Money, Banking and the Macroeconomy Midterm Exam 2

ECON 4110: Money, Banking and the Macroeconomy Midterm Exam 2 Name: SID: MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following

### Lecture Notes on MONEY, BANKING, AND FINANCIAL MARKETS. Peter N. Ireland Department of Economics Boston College. irelandp@bc.edu

Lecture Notes on MONEY, BANKING, AND FINANCIAL MARKETS Peter N. Ireland Department of Economics Boston College irelandp@bc.edu http://www2.bc.edu/~irelandp/ec261.html Chapter 16: Determinants of the Money

### Practice Problems Mods 25, 28, 29

Practice Problems Mods 25, 28, 29 Multiple Choice Identify the choice that best completes the statement or answers the question. Scenario 25-1 First National Bank First National Bank has \$80 million in

### National Margin Lending. Make your investment portfolio work for you

National Margin Lending Make your investment portfolio work for you Contents What is Margin Lending? 3 Why choose National Margin lending? 5 Why gear? 6 How much can you borrow with National Margin Lending?

### The Federal Reserve System. The Structure of the Fed. The Fed s Goals and Targets. Economics 202 Principles Of Macroeconomics

Economics 202 Principles Of Macroeconomics Professor Yamin Ahmad The Federal Reserve System The Federal Reserve System, or the Fed, is the central bank of the United States. Supplemental Notes to Monetary

### Lecture Notes on MONEY, BANKING, AND FINANCIAL MARKETS. Peter N. Ireland Department of Economics Boston College. irelandp@bc.edu

Lecture Notes on MONEY, BANKING, AND FINANCIAL MARKETS Peter N. Ireland Department of Economics Boston College irelandp@bc.edu http://www2.bc.edu/~irelandp/ec261.html Chapter 17a: The Tools of Monetary

### Chapter 12 Practice Problems

Chapter 12 Practice Problems 1. Bankers hold more liquid assets than most business firms. Why? The liabilities of business firms (money owed to others) is very rarely callable (meaning that it is required

### Review of what we studied so far

Review of what we studied so far We have studied 2 reasons why banks (more generally a financial system) are useful: 1. by monitoring firms and making it harder for entrepreneurs to shirk banks allow projects

### THE FINANCIAL CRISIS: Is This a REPEAT OF THE 80 S FOR AGRICULTURE? Mike Boehlje and Chris Hurt, Department of Agricultural Economics

THE FINANCIAL CRISIS: Is This a REPEAT OF THE 80 S FOR AGRICULTURE? Mike Boehlje and Chris Hurt, Department of Agricultural Economics The current financial crisis in the capital markets combined with recession

### The Bank Balance Sheet

Chapter 9 THE BANKING FIRM AND THE MANAGEMENT OF FINANCIAL INSTITUTIONS The Bank Balance Sheet T-account Analysis: Bank Operation Deposit of \$100 cash into First National Bank Vault Cash + \$100 Checkable

### Chapter 17. Preview. Introduction. Fixed Exchange Rates and Foreign Exchange Intervention

Chapter 17 Fixed Exchange Rates and Foreign Exchange Intervention Slides prepared by Thomas Bishop Copyright 2009 Pearson Addison-Wesley. All rights reserved. Preview Balance sheets of central banks Intervention

### Practice Problems on Money and Monetary Policy

Practice Problems on Money and Monetary Policy 1- Define money. How does the economist s use of this term differ from its everyday meaning? Money is the economist s term for assets that can be used in

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

ECON 4110: Sample Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Economists define risk as A) the difference between the return on common

### ANSWERS TO END-OF-CHAPTER PROBLEMS WITHOUT ASTERISKS

Part III Answers to End-of-Chapter Problems 97 CHAPTER 1 ANSWERS TO END-OF-CHAPTER PROBLEMS WITHOUT ASTERISKS Why Study Money, Banking, and Financial Markets? 7. The basic activity of banks is to accept

### Econ 202 Section H01 Midterm 2

, Spring 2010 March 16, 2010 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 202 Section H01 Midterm 2 Multiple Choice. 2.5 points each. 1. What would

### Mishkin ch.14: The Money Supply Process

Mishkin ch.14: The Money Supply Process Objective: Show how the Fed controls stocks of money; focus on M1. - Macro theory simply assumes that the Fed can set M via open market operations. - Point here:

### The University Of California Home Loan Program Corporation (A Component Unit of the University of California)

Report Of Independent Auditors And Financial Statements The University Of California Home Loan Program Corporation (A Component Unit of the University of California) As of and for the periods ended June

### Econ 202 Section 4 Final Exam

Douglas, Fall 2009 December 15, 2009 A: Special Code 00004 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 202 Section 4 Final Exam 1. Oceania buys \$40

### 1. Firms react to unplanned inventory investment by increasing output.

Macro Exam 2 Self Test -- T/F questions Dr. McGahagan Fill in your answer (T/F) in the blank in front of the question. If false, provide a brief explanation of why it is false, and state what is true.

### Chapter 11 The Central Bank Balance Sheet and the Money Supply Process

Chapter 11 The Central Bank Balance Sheet Problems and Solutions 1. In an effort to diversify, the Central Bank of China has decided to exchange some of its dollar reserves for euros. Follow the impact

### VOCABULARY INVESTING Student Worksheet

Vocabulary Worksheet Page 1 Name Period VOCABULARY INVESTING Student Worksheet PRIMARY VOCABULARY 1. Savings: 2. Investments: 3. Investing: 4. Risk: 5. Return: 6. Liquidity: 7. Stocks: 8. Bonds: 9. Mutual

### Untangling F9 terminology

Untangling F9 terminology Welcome! This is not a textbook and we are certainly not trying to replace yours! However, we do know that some students find some of the terminology used in F9 difficult to understand.

### THE BANK'S BALANCE SHEET. Lecture 3 Monetary policy

THE BANK'S BALANCE SHEET Lecture 3 Monetary policy THE BANK'S BALANCE SHEET Like any balance sheet, bank balance sheet lines up the assets on one side and the liabilities on the other side. Two sides equal

### 3. a. If all money is held as currency, then the money supply is equal to the monetary base. The money supply will be \$1,000.

Macroeconomics ECON 2204 Prof. Murphy Problem Set 2 Answers Chapter 4 #2, 3, 4, 5, 6, 7, and 9 (on pages 102-103) 2. a. When the Fed buys bonds, the dollars that it pays to the public for the bonds increase

### Shares Mutual funds Structured bonds Bonds Cash money, deposits

FINANCIAL INSTRUMENTS AND RELATED RISKS This description of investment risks is intended for you. The professionals of AB bank Finasta have strived to understandably introduce you the main financial instruments

### Lecture Notes on MONEY, BANKING, AND FINANCIAL MARKETS. Peter N. Ireland Department of Economics Boston College. irelandp@bc.edu

Lecture Notes on MONEY, BANKING, AND FINANCIAL MARKETS Peter N. Ireland Department of Economics Boston College irelandp@bc.edu http://www2.bc.edu/~irelandp/ec261.html Chapter 15c: The Fed s Control of

### QUIZ IV Version 1. March 24, 2004. 4:35 p.m. 5:40 p.m. BA 2-210

NAME: Student ID: College of Business Administration Department of Economics Principles of Macroeconomics O. Mikhail ECO 2013-0008 Spring 2004 QUIZ IV Version 1 This closed book QUIZ is worth 100 points.

### Cosumnes River College Principles of Macroeconomics Problem Set 3 Due September 17, 2015

Cosumnes River College Principles of Macroeconomics Problem Set 3 Due September 17, 2015 Name: Solutions Fall 2015 Prof. Dowell Instructions: Write the answers clearly and concisely on these sheets in

### Pre-Test Chapter 12 ed17

Pre-Test Chapter 12 ed17 Multiple Choice Questions 1. A \$20 bill is a: A. gold certificate. B. Treasury note. C. Treasury bill. D. Federal Reserve Note. 2. Which of the following is not part of the M2

### Econ 202 Final Exam. Table 3-1 Labor Hours Needed to Make 1 Pound of: Meat Potatoes Farmer 8 2 Rancher 4 5

Econ 202 Final Exam 1. If inflation expectations rise, the short-run Phillips curve shifts a. right, so that at any inflation rate unemployment is higher. b. left, so that at any inflation rate unemployment

### Accounts payable Money which you owe to an individual or business for goods or services that have been received but not yet paid for.

A Account A record of a business transaction. A contract arrangement, written or unwritten, to purchase and take delivery with payment to be made later as arranged. Accounts payable Money which you owe

### _FALSE 1. Firms react to unplanned inventory investment by increasing output.

Macro Exam 2 Self Test -- ANSWERS Dr. McGahagan WARNING -- Be sure to take the self-test before peeking at the answers. Chapter 8 -- Aggregate Expenditure and Equilibrium Output _FALSE 1. Firms react to

### SRAS. is less than Y P

KrugmanMacro_SM_Ch12.qxp 11/15/05 3:18 PM Page 141 Fiscal Policy 1. The accompanying diagram shows the current macroeconomic situation for the economy of Albernia. You have been hired as an economic consultant

### Top 50 Banking Interview Questions

Top 50 Banking Interview Questions 1) What is bank? What are the types of banks? A bank is a financial institution licensed as a receiver of cash deposits. There are two types of banks, commercial banks

### Visual One Grades 9-12 1 examples Of CurrenCy and COin

Visual One Examples of Currency and Coin 2 Tw o Ch e c k a n d Debit Card BIG BUCKS BANK NO. 338 PAY TO THE ORDER OF MEMO Uncle Sam One Thousand Dollars and no /00 \$,000.00 Ima Citizen Big Bucks Bank 3

### Exam 1 Review. 3. A severe recession is called a(n): A) depression. B) deflation. C) exogenous event. D) market-clearing assumption.

Exam 1 Review 1. Macroeconomics does not try to answer the question of: A) why do some countries experience rapid growth. B) what is the rate of return on education. C) why do some countries have high

### MAKING MONEY CLASSROOM GAMES. Susan K. Laury and Charles A. Holt * April 1997

CLASSROOM GAMES MAKING MONEY Susan K. Laury and Charles A. Holt * April 1997 Abstract: This paper describes a classroom exercise in which students are engaged in the process of money creation, via a circle

### asset classes Understanding Equities Property Bonds Cash

NEWSLETTER Understanding asset classes High return Property FIND OUT MORE Equities FIND OUT MORE Bonds FIND OUT MORE Cash FIND OUT MORE Low risk High risk Asset classes are building blocks of any investment.

### Asset Allocation and Members Benefits Flows

Reporting Standard SRS 533.1 Asset Allocation and Members Benefits Flows Objective of this Reporting Standard This Reporting Standard sets out the requirements for the provision of information to APRA

### Financial Market Instruments

appendix to chapter 2 Financial Market Instruments Here we examine the securities (instruments) traded in financial markets. We first focus on the instruments traded in the money market and then turn to

### International Money and Banking: 12. The Term Structure of Interest Rates

International Money and Banking: 12. The Term Structure of Interest Rates Karl Whelan School of Economics, UCD Spring 2015 Karl Whelan (UCD) Term Structure of Interest Rates Spring 2015 1 / 35 Beyond Interbank

### Investing Practice Questions

Investing Practice Questions 1) When interest is calculated only on the principal amount of the investment, it is known as: a) straight interest b) simple interest c) compound interest d) calculated interest

### Some Answers. a) If Y is 1000, M is 100, and the growth rate of nominal money is 1%, what must i and P be?

Some Answers 1) Suppose that real money demand is represented by the equation (M/P) d = 0.25*Y. Use the quantity equation to calculate the income velocity of money. V = 4. 2) Assume that the demand for

### What s on a bank s balance sheet?

The Capital Markets Initiative January 2014 TO: Interested Parties FROM: David Hollingsworth and Lauren Oppenheimer RE: Capital Requirements and Bank Balance Sheets: Reviewing the Basics What s on a bank

### Economics 152 Solution to Sample Midterm 2

Economics 152 Solution to Sample Midterm 2 N. Das PART 1 (84 POINTS): Answer the following 28 multiple choice questions on the scan sheet. Each question is worth 3 points. 1. If Congress passes legislation

### Lesson 8 Save and Invest: The Rise and Fall of Risk and Return

Lesson 8 Save and Invest: The Rise and Fall of Risk and Return Lesson Description This lesson begins with a brainstorming session in which students identify the risks involved in playing sports or driving

### Money, Banking, and the Federal Reserve Bank (Monetary Policy) Chapter 10, Page 256

Money, Banking, and the Federal Reserve Bank (Monetary Policy) Chapter 10, Page 256 Money Part I Money Objectives: In this lesson, students will be able to identify characteristic of money and the advantages

### ONE HEN ACADEMY EDUCATOR GUIDE

ONE HEN ACADEMY EDUCATOR GUIDE 2013 One Hen, Inc. 3 OHA Module 3: Loans, Interest, & Borrowing Money This OHA Module introduces students to the common financial concepts of loans, loan interest, and the

### Jane D Arista, Political Economy Research Institute (PERI) ECONOMISTS' COMMITTEE FOR STABLE, ACCOUNTABLE, FAIR AND EFFICIENT FINANCIAL REFORM

policy brief #1 Leverage, Proprietary Trading and Funding Activities Jane D Arista, Political Economy Research Institute (PERI) October 7, 2009 SAFER A PROJECT OF THE POLITICAL ECONOMY RESEARCH INSTITUTE

### changes in spending changes in income/output AE = Aggregate Expenditures = C + I + G + Xn = AD

small larger changes in spending changes in income/output AE = Aggregate Expenditures = C + I + G + Xn = AD The Multiplier Effect A small change in spending gives rise to a larger change in income/output

### Chapter 1 THE MONEY MARKET

Page 1 The information in this chapter was last updated in 1993. Since the money market evolves very rapidly, recent developments may have superseded some of the content of this chapter. Chapter 1 THE

### With lectures 1-8 behind us, we now have the tools to support the discussion and implementation of economic policy.

The Digital Economist Lecture 9 -- Economic Policy With lectures 1-8 behind us, we now have the tools to support the discussion and implementation of economic policy. There is still great debate about

### Statistics Netherlands. Macroeconomic Imbalances Factsheet

Macroeconomic Imbalances Factsheet Introduction Since the outbreak of the credit crunch crisis in 2008, and the subsequent European debt crisis, it has become clear that there are large macroeconomic imbalances

### This is Interest Rate Determination, chapter 7 from the book Policy and Theory of International Finance (index.html) (v. 1.0).

This is Interest Rate Determination, chapter 7 from the book Policy and Theory of International Finance (index.html) (v. 1.0). This book is licensed under a Creative Commons by-nc-sa 3.0 (http://creativecommons.org/licenses/by-nc-sa/

### Fidelity Emerging Markets Fund 14 Fidelity Europe Fund 12 Fidelity Far East Fund 3,10 Fidelity Global Fund 1,14 Fidelity Global Disciplined

Simplified Prospectus dated October 29, 2015 Fidelity Funds Series A, Series B, Series F and Series O units (unless otherwise indicated) Equity Funds Canadian Equity Funds Fidelity Canadian Disciplined

### How To Invest In Stocks And Bonds

Review for Exam 1 Instructions: Please read carefully The exam will have 21 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation

### Money Supply. Key point: if banks hold 100% reserves (i.e., make no loans), they do not change the money supply. 1. Who affects the money supply?

Money Supply 1. Who affects the money supply? 2. 100% reserve banking 3. Fractional reserve banking 4. Money Supply determination and the money multiplier 5. What causes money supply to change? 6. Instruments

### APPENDIX 3 TIME VALUE OF MONEY. Time Lines and Notation. The Intuitive Basis for Present Value

1 2 TIME VALUE OF MONEY APPENDIX 3 The simplest tools in finance are often the most powerful. Present value is a concept that is intuitively appealing, simple to compute, and has a wide range of applications.

### Ratios from the Statement of Financial Position

For The Year Ended 31 March 2007 Ratios from the Statement of Financial Position Profitability Ratios Return on Sales Ratio (%) This is the difference between what a business takes in and what it spends

### Chapter 5 Financial Forwards and Futures

Chapter 5 Financial Forwards and Futures Question 5.1. Four different ways to sell a share of stock that has a price S(0) at time 0. Question 5.2. Description Get Paid at Lose Ownership of Receive Payment

### How do Central Banks Determine Interest Rates?

TELLUS Something New How do Central Banks Determine Interest Rates? A Macro Update by Torgeir Høien, Portfolio Manager of SKAGEN Tellus January 3, 2011 Overview Central banks try to control inflation by

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) When a new depositor opens a checking account at the First National Bank, the bank's

### LESSON 12 ALL SAVINGS CHOICES INVOLVE RISK: GRANDMA S GIFT

LESSON 12 ALL SAVINGS CHOICES INVOLVE RISK: GRANDMA S GIFT INTRODUCTION In this lesson, students learn that all savings choices involve risk. Students evaluate various alternatives for saving money. ECONOMICS

### Public Information Center Federal Reserve Bank of Chicago P.O. Box 834 Chicago, IL 60690-0834 Tel. (312) 322-5111 www.frbchi.org

Points of Interest is one of a series of essays adapted from articles in On Reserve, a newsletter for economic educators published by the Federal Reserve Bank of Chicago. The original article was written

### \$SSHQGL[+6XEPLVVLRQ1R1RWHVRQ %DQN)HHVLQ\$XVWUDOLD

+ \$SSHQGL[+6XEPLVVLRQ1R1RWHVRQ %DQN)HHVLQ\$XVWUDOLD 50 NOTES ON BANK FEES IN AUSTRALIA These notes update, and expand, the information on bank fees in Australia which was published in the in the Reserve

### Key learning points I

Key learning points I What do banks do? Banks provide three core banking services Deposit collection Payment arrangement Underwrite loans Banks may also offer financial services such as cash, asset, and