ECON 214 HW16 Monetary System Assignment solutions complete answers

ECON 214 HW16 Monetary System Assignment solutions complete answers

 

1. The roles of money

Hubert wants to both purchase a new laptop and go Florida for spring break. The computer is priced at $1,299, and the vacation is priced at $750. He has only $1,537 in his checking account, so he cannot afford to purchase both. After much thought, Hubert buys the laptop and writes a check for $1,299.

Identify what role money plays in each of the following parts of the story.

Hint: Select each role only once.

Role of Money
Medium of Exchange
Unit of Account
Store of Value
Hubert has $1,537 in his checking account.
 
 
 
 
Hubert writes a check for $1,299.
 
 
 
 
Hubert can easily determine that the price of the laptop is more than the price of the vacation.
 
 
 
 
 

Larry has saved $30 per week to buy a preowned gaming console. He compares two different models: a Sintendo that is priced at $130 and a Nony system that is priced at $140. Larry decides to purchase the used Nony system for $140.

Identify what role money plays in each of the following parts of the story.

Hint: Select each role only once.

Role of Money
Medium of Exchange
Unit of Account
Store of Value
Larry pays $140 for the gaming console.
 
 
 
 
Larry can easily determine that the Sintendo system has a lower price than the Nony system.
 
 
 
 
Larry saved $30 per week.
 
 
 



 

Clancy just graduated from college and is now in the market for a new car. He has saved up $4,000 for a down payment. He has the decision narrowed down to a Cord and a Fevvy. The Cord is priced at $23,599, and the Fevvy is priced at $18,999. After agonizing over the decision, he decides to buy the Fevvy. He writes the dealership a check for $4,000 and takes out a loan for the remainder of the purchase price.

Identify what role money plays in each of the following parts of the story.

Hint: Select each role only once.

Role of Money
Medium of Exchange
Unit of Account
Store of Value
Clancy can easily determine that the price of the Cord is more than the price of the Fevvy.
 
 
 
 
Clancy has saved $4,000 in his checking account.
 
 
 
 
Clancy writes a check for $4,000.
 
 
 



 

2. Liquidity

Consider the relative liquidity of the following assets:

Assets

1.
A $1 bill
2.
The funds in a money market account
3.
Your condo
4.
A share in a publicly traded company
Select the assets in order of their liquidity, from most liquid to least liquid.

 
Asset
Most Liquid
    
Second-Most Liquid
    
Third-Most Liquid
    
Least Liquid
    
 

Consider the relative liquidity of the following assets:

Assets

1.
Your truck
2.
The funds in a savings account
3.
A bond issued by a publicly traded company
4.
A $100 bill
Select the assets in order of their liquidity, from most liquid to least liquid.

 
Asset
Most Liquid
    
Second-Most Liquid
    
Third-Most Liquid
    
Least Liquid
    
 

Consider the relative liquidity of the following assets:

Assets

1.
A $20 bill
2.
A share in a publicly traded company
3.
The funds in a money market account
4.
A painting you own
Select the assets in order of their liquidity, from most liquid to least liquid.

 
Asset
Most Liquid
    
Second-Most Liquid
    
Third-Most Liquid
    
Least Liquid
    
 

3. The kinds of money

Suppose an extended period of political upheaval leads individuals to believe that the economy is heading toward a long recession. As a result, people will likely become more willing to accept    money in exchange for goods and services.

U.S. dollars are an example of    money.

 

Despite the fact that personal possession of currency is not allowed by U.S. prisons, in reality, incarcerated people still exchange goods and services. Until 2003, the year in which the U.S. government banned smoking in federal penitentiaries, cigarettes were the preferred medium of exchange among prisoners. A main difference between using cigarettes and using dollars as money is that    have intrinsic value.

Cigarettes are an example of    money.

 

Despite the fact that personal possession of currency is not allowed by U.S. prisons, in reality, incarcerated people still exchange goods and services. U.S. prisoners used cigarettes as a medium of exchange until smoking was banned in U.S. prisons in 2003. After 2003, prisoners looked to other items on the commissary menu to facilitate exchange. In 2008, the Wall Street Journal reported that energy bars had caught on as money in some U.S. prisons. A main difference between using energy bars and using dollars as money is that    have intrinsic value.

U.S. dollars are an example of    money.

 

4. Money aggregates

Identify whether each of the following examples belongs in M1 or M2. If an example belongs in both, be sure to check both boxes.

Example
M1
M2
Brian has $1,200 in a checking account.
 
 
 
Hilary has $8,000 in a two-year certificate of deposit (CD).
 
 
 
Edison has $25,000 in a money market account.
 
 
 
 

Identify whether each of the following examples belongs in M1 or M2. If an example belongs in both, be sure to check both boxes.

Example
M1
M2
Hilary has $10,000 in a six-month certificate of deposit (CD).
 
 
 
Brian has a roll of quarters that he just withdrew from the bank to do laundry.
 
 
 
Edison has $30,000 in a money market account.
 
 
 
 

Identify whether each of the following examples belongs in M1 or M2. If an example belongs in both, be sure to check both boxes.

Example
M1
M2
Susan has $7,000 in a two-year certificate of deposit (CD).
 
 
 
Larry has $2,500 in a savings account.
 
 
 
Raphael has $20,000 in a money market account.
 
 
 
 

5. The Federal Reserve's organization

The interest rate on reserves is the interest rate that the Fed pays banks for holding reserves on deposit at the Fed. For many years, open market operations were the Fed’s primary tool for monetary policy. However, since October 2008, it relies more on interest on reserves.

An increase in the interest rate on reserves tends to encourage banks to hold     reserves.

 

The interest rate on reserves is the interest rate that the Fed pays banks for holding reserves on deposit at the Fed. For many years, open market operations were the Fed’s primary tool for monetary policy. However, since October 2008, it relies more on interest on reserves.

A decrease in the interest rate on reserves tends to     the resreve ratio,    the money multiplier, and      the money supply.

 

The interest rate on reserves is the interest rate that the Fed pays banks for holding reserves on deposit at the Fed. For many years, open market operations were the Fed’s primary tool for monetary policy. However, since October 2008, it relies more on interest on reserves.

An increase in the interest rate on reserves tends to     the reserve ratio,    the money multiplier, and     the money supply.

 

6. Required and excess reserves

Suppose that Southeast Mutual Bank currently has $200,000 in demand deposits and $130,000 in outstanding loans. Assume the Federal Reserve has the reserve requirement set at 10%.

Based on this information, complete the following table detailing Southeast Mutual Bank’s reserves, required reserves, and excess reserves.

Southeast Mutual
Reserves
Required Reserves
Excess Reserves
(Dollars)
(Dollars)
(Dollars)
 

Suppose that Walls Fergo Bank currently has $100,000 in demand deposits and $70,000 in outstanding loans. Assume the Federal Reserve has the reserve requirement set at 20%.

Based on this information, complete the following table detailing Walls Fergo Bank’s reserves, required reserves, and excess reserves.

 

Suppose that Atlantic National Bank currently has $150,000 in demand deposits and $97,500 in outstanding loans. Assume the Federal Reserve has the reserve requirement set at 15%.

Based on this information, complete the following table detailing Atlantic National Bank’s reserves, required reserves, and excess reserves.

 

7. The money creation process

Suppose Southeast Mutual Bank, Walls Fergo Bank, and PJMorton Bank all have zero excess reserves. The required reserve ratio is presently set at 20%. Yakov, a Southeast Mutual Bank customer, deposits $1,500,000 into his checking account at the local branch.

Complete the following table to reflect any changes in Southeast Mutual Bank's T-account (before the bank makes any new loans).

Assets
Liabilities
    
    
    
    
 
 
 
 
Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 20%.

Hint: If the change is negative, be sure to enter the value as negative number.

Amount Deposited
Change in Excess Reserves
Change in Required Reserves
(Dollars)
(Dollars)
(Dollars)
1,500,000
 

 
 
Now, suppose Southeast Mutual Bank loans out all of its new excess reserves to Simone, who immediately uses the funds to write a check to Rajiv. Rajiv deposits the funds immediately into his checking account at Walls Fergo Bank. Then Walls Fergo Bank lends out all of its new excess reserves to Charles, who writes a check to Ana, who deposits the money into her account at PJMorton Bank. PJMorton lends out all of its new excess reserves to Dina in turn.

Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter each answer to the nearest dollar.

 
Increase in Deposits
Increase in Required Reserves
Increase in Loans
(Dollars)
(Dollars)
(Dollars)
Southeast Mutual Bank
 
 
 
Walls Fergo Bank
 
 
 
PJMorton Bank
 
 
 
Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $1,500,000 injection into the money supply results in an overall increase of    in demand deposits.

 

Suppose Southeast Mutual Bank, Walls Fergo Bank, and PJMorton Bank all have zero excess reserves. The required reserve ratio is presently set at 10%. Edison, a Southeast Mutual Bank customer, deposits $250,000 into his checking account at the local branch.

Complete the following table to reflect any changes in Southeast Mutual Bank's T-account (before the bank makes any new loans).

Assets
Liabilities
    
    
    
    
 
 
 
 
Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 10%.

Hint: If the change is negative, be sure to enter the value as negative number.

Amount Deposited
Change in Excess Reserves
Change in Required Reserves
(Dollars)
(Dollars)
(Dollars)
250,000
 

 
 
Now, suppose Southeast Mutual Bank loans out all of its new excess reserves to Crystal, who immediately uses the funds to write a check to Brian. Brian deposits the funds immediately into his checking account at Walls Fergo Bank. Then Walls Fergo Bank lends out all of its new excess reserves to Kevin, who writes a check to Hilary, who deposits the money into her account at PJMorton Bank. PJMorton lends out all of its new excess reserves to Maria in turn.

Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter each answer to the nearest dollar.

 
Increase in Deposits
Increase in Required Reserves
Increase in Loans
(Dollars)
(Dollars)
(Dollars)
Southeast Mutual Bank
 
 
 
Walls Fergo Bank
 
 
 
PJMorton Bank
 
 
 
Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $250,000 injection into the money supply results in an overall increase of    in demand deposits.

 

Suppose Southeast Mutual Bank, Walls Fergo Bank, and PJMorton Bank all have zero excess reserves. The required reserve ratio is presently set at 25%. Rajiv, a Southeast Mutual Bank customer, deposits $1,800,000 into his checking account at the local branch.

Complete the following table to reflect any changes in Southeast Mutual Bank's T-account (before the bank makes any new loans).

Assets
Liabilities
    
    
    
    
 
 
 
 
Complete the following table to show the effect of a new deposit on excess and required reserves when the required reserve ratio is 25%.

Hint: If the change is negative, be sure to enter the value as negative number.

Amount Deposited
Change in Excess Reserves
Change in Required Reserves
(Dollars)
(Dollars)
(Dollars)
1,800,000
 

 
 
Now, suppose Southeast Mutual Bank loans out all of its new excess reserves to Maria, who immediately uses the funds to write a check to Kevin. Kevin deposits the funds immediately into his checking account at Walls Fergo Bank. Then Walls Fergo Bank lends out all of its new excess reserves to Yakov, who writes a check to Simone, who deposits the money into her account at PJMorton Bank. PJMorton lends out all of its new excess reserves to Ana in turn.

Fill in the following table to show the effect of this ongoing chain of events at each bank. Enter each answer to the nearest dollar.

 
Increase in Deposits
Increase in Required Reserves
Increase in Loans
(Dollars)
(Dollars)
(Dollars)
Southeast Mutual Bank
 
 
 
Walls Fergo Bank
 
 
 
PJMorton Bank
 
 
 
Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $1,800,000 injection into the money supply results in an overall increase of    in demand deposits.

 

8. The reserve requirement, open market operations, and the money supply

Consider a system of banking in which the Federal Reserve uses required reserves to control the money supply (as was the case in the United States before 2008). Assume that banks do not hold excess reserves and that households do not hold currency, so the only money exists in the form of demand deposits. To further simplify, assume the banking system has total reserves of $300. Determine the money multiplier as well as the money supply for each reserve requirement listed in the following table.

Reserve Requirement
Simple Money Multiplier
Money Supply
(Percent)
(Dollars)
20
    
    
10
    
    
A higher reserve requirement is associated with a    money supply.

Suppose the Federal Reserve wants to increase the money supply by $200. Maintain the assumption that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to    

 

worth of U.S. government bonds.

Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions. Specifically, banks increase the percentage of deposits held as reserves from 10% to 25%. This increase in the reserve ratio causes the money multiplier to    to    . Under these conditions, the Fed would need to    

 

worth of U.S. government bonds in order to increase the money supply by $200.

Which of the following statements help to explain why, in the real world, the Fed cannot precisely control the money supply? Check all that apply.

 The Fed cannot control the amount of money that households choose to hold as currency.

 The Fed cannot prevent banks from lending out required reserves.

 The Fed cannot control whether and to what extent banks hold excess reserves.

 

8. The reserve requirement, open market operations, and the money supply

Consider a system of banking in which the Federal Reserve uses required reserves to control the money supply (as was the case in the United States before 2008). Assume that banks do not hold excess reserves and that households do not hold currency, so the only money exists in the form of demand deposits. To further simplify, assume the banking system has total reserves of $300. Determine the money multiplier as well as the money supply for each reserve requirement listed in the following table.

Reserve Requirement
Simple Money Multiplier
Money Supply
(Percent)
(Dollars)
20
    
    
10
    
    
A higher reserve requirement is associated with a    money supply.

Suppose the Federal Reserve wants to increase the money supply by $200. Maintain the assumption that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to    

 

worth of U.S. government bonds.

Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions. Specifically, banks increase the percentage of deposits held as reserves from 10% to 25%. This increase in the reserve ratio causes the money multiplier to    to    . Under these conditions, the Fed would need to    

 

worth of U.S. government bonds in order to increase the money supply by $200.

Which of the following statements help to explain why, in the real world, the Fed cannot precisely control the money supply? Check all that apply.

 The Fed cannot control the amount of money that households choose to hold as currency.

 The Fed cannot prevent banks from lending out required reserves.

 The Fed cannot control whether and to what extent banks hold excess reserves.

 

Consider a system of banking in which the Federal Reserve uses required reserves to control the money supply (as was the case in the United States before 2008). Assume that banks do not hold excess reserves and that households do not hold currency, so the only money exists in the form of demand deposits. To further simplify, assume the banking system has total reserves of $200. Determine the money multiplier as well as the money supply for each reserve requirement listed in the following table.

Reserve Requirement
Simple Money Multiplier
Money Supply
(Percent)
(Dollars)
25
    
    
10
    
    
A lower reserve requirement is associated with a    money supply.

Suppose the Federal Reserve wants to increase the money supply by $200. Maintain the assumption that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to    

 

worth of U.S. government bonds.

Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions. Specifically, banks increase the percentage of deposits held as reserves from 10% to 25%. This increase in the reserve ratio causes the money multiplier to    to    . Under these conditions, the Fed would need to    

 

worth of U.S. government bonds in order to increase the money supply by $200.

Which of the following statements help to explain why, in the real world, the Fed cannot precisely control the money supply? Check all that apply.

 The Fed cannot control whether and to what extent banks hold excess reserves.

 The Fed cannot control the amount of money that households choose to hold as currency.

 The Fed cannot prevent banks from lending out required reserves.

 

Consider a system of banking in which the Federal Reserve uses required reserves to control the money supply (as was the case in the United States before 2008). Assume that banks do not hold excess reserves and that households do not hold currency, so the only money exists in the form of demand deposits. To further simplify, assume the banking system has total reserves of $300. Determine the money multiplier as well as the money supply for each reserve requirement listed in the following table.

Reserve Requirement
Simple Money Multiplier
Money Supply
(Percent)
(Dollars)
20
    
    
10
    
    
A higher reserve requirement is associated with a    money supply.

Suppose the Federal Reserve wants to increase the money supply by $100. Maintain the assumption that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%, the Fed will use open-market operations to    

 

worth of U.S. government bonds.

Now, suppose that, rather than immediately lending out all excess reserves, banks begin holding some excess reserves due to uncertain economic conditions. Specifically, banks increase the percentage of deposits held as reserves from 10% to 20%. This increase in the reserve ratio causes the money multiplier to    to    . Under these conditions, the Fed would need to    

 

worth of U.S. government bonds in order to increase the money supply by $100.

Which of the following statements help to explain why, in the real world, the Fed cannot precisely control the money supply? Check all that apply.

 The Fed cannot control the amount of money that households choose to hold as currency.

 The Fed cannot prevent banks from lending out required reserves.

 The Fed cannot control whether and to what extent banks hold excess reserves.

 

9. Bank leverage

Use the information given in Great Lakes National Bank's balance sheet to answer the following questions.

Bank's Balance Sheet
Assets
Liabilities and Owners' Equity
Reserves
$175
Deposits
$1,400
Loans
$700
Debt
$225
Securities
$875
Capital (owners' equity)
$125
Suppose the owners of the bank borrow $100 to supplement their existing reserves. This would increase the reserves account and    the    account.

This would also bring the leverage ratio from its initial value of    to a new value of    .

Which of the following do bankers consider when deciding how to allocate their assets? Check all that apply.

 The total value of liabilities

 The size of the monetary base

 The riskiness of each asset

 

Use the information given in North Central National Bank's balance sheet to answer the following questions.

Bank's Balance Sheet
Assets
Liabilities and Owners' Equity
Reserves
$125
Deposits
$1,250
Loans
$625
Debt
$75
Securities
$500
Capital (owners' equity)
-$75
Suppose the owners of the bank contribute an additional $200 from their own funds and use it to buy securities in the name of the bank. This would increase the securities account and    the    account.

This would also bring the leverage ratio from its initial value of    to a new value of    .

Which of the following statements regarding the capital requirement is true? Check all that apply.

 It specifies a minimum leverage ratio for all banks.

 Its intended goal is to protect the interests of those who hold equity in the bank.

 Its intended goal is to protect the interests of the depositors.

 

Use the information given in Upper Midwest National Bank's balance sheet to answer the following questions.

Bank's Balance Sheet
Assets
Liabilities and Owners' Equity
Reserves
$100
Deposits
$800
Loans
$400
Debt
$150
Securities
$500
Capital (owners' equity)
$50
Suppose a new customer adds $100 to his account at Upper Midwest National Bank, which the owners of the bank then use to make $100 worth of new loans. This would increase the loans account and    the    account.

This would also bring the leverage ratio from its initial value of    to a new value of    .

Which of the following do bankers consider when deciding how to allocate their assets? Check all that apply.

 The return on each asset

 The total value of liabilities

 The size of the monetary base

 

10. The discount rate and the federal funds rate

The Federal Reserves establishes the interest rate charged on funds it loans to banks and other financial institutions. A lower interest rate    the incentive to borrow funds from the Federal Reserve, thereby    the quantity of reserves in the banking system, which causes the money supply to    .

When the Federal Reserve loans more funds to banks and another financial institutions, the quantity of reserves in the banking system     and the money supply    .

 

The Federal Reserves establishes the interest rate charged on funds it loans to banks and other financial institutions. A higher interest rate    the incentive to borrow funds from the Federal Reserve, thereby    the quantity of reserves in the banking system, which causes the money supply to    .

When the Federal Reserve loans more funds to banks and another financial institutions, the quantity of reserves in the banking system     and the money supply    .

 

The Federal Reserves establishes the interest rate charged on funds it loans to banks and other financial institutions. A lower interest rate    the incentive to borrow funds from the Federal Reserve, thereby    the quantity of reserves in the banking system, which causes the money supply to    .

When the Federal Reserve loans less funds to banks and another financial institutions, the quantity of reserves in the banking system     and the money supply    .

 

11. How the Fed Influences the Reserve Ratio

The interest rate on reserves is the interest rate that the Fed pays banks for holding reserves on deposit at the Fed. For many years, open market operations were the Fed’s primary tool for monetary policy. However, since October 2008, it relies more on interest on reserves.

An increase in the interest rate on reserves tends to encourage banks to hold     reserves.

 

The interest rate on reserves is the interest rate that the Fed pays banks for holding reserves on deposit at the Fed. For many years, open market operations were the Fed’s primary tool for monetary policy. However, since October 2008, it relies more on interest on reserves.

A decrease in the interest rate on reserves tends to     the resreve ratio,    the money multiplier, and      the money supply.

 

The interest rate on reserves is the interest rate that the Fed pays banks for holding reserves on deposit at the Fed. For many years, open market operations were the Fed’s primary tool for monetary policy. However, since October 2008, it relies more on interest on reserves.

An increase in the interest rate on reserves tends to     the reserve ratio,    the money multiplier, and     the money supply.