Question details

ECON 213 Problem Set 5 A++
$ 15.00

1)

What are the three functions of money? Which function is the defining characteristic?

1)

Medium of exchange – what people trade for goods and services

2)

Unit of account – measure in which prices are quoted

3)

Store of value – holding wealth

4)

How is the discount rate different from the federal funds rate?

5)

Consider the balance sheet for the Wahoo bank as presented below.

Wahoo Bank Balance Sheet

Assets

Liabilities

government

securities

$1,600

Liabilities:

Checking

accounts

$4,000

Required

Reserves

$400

Net Worth

$1,000

Excess

Reserves

$0

Loans

$3,000

Total Assets

$5,000

Total

Liabilities

$5,000

Using a required reserve ratio of 10% and assuming that the bank keeps no excess reserves, write

the changes to the balance sheet for each of the following scenarios:

a.

Bennett withdraws $200 from his checking account.

Wahoo Bank Balance Sheet

Assets

Liabilities

government

securities

$1,600

Liabilities:

Checking

accounts

$3800

Required

Reserves

$400

Net Worth

$1,000

Excess

Reserves

$0

Loans

$3,000

Total Assets

$5,000

Total

Liabilities

$4,800

 

ECON 214

b.

Roland deposits $500 into his checking account.

Wahoo Bank Balance Sheet

Assets

Liabilities

government

securities

$1,600

Liabilities:

Checking

accounts

$4500

Required

Reserves

$400

Net Worth

$1,000

Excess

Reserves

$50

Loans

$3,450

Total Assets

$5,500

Total

Liabilities

$5,000

c.

The Fed buys $1,000 in government securities from the bank.

Wahoo Bank Balance Sheet

Assets

Liabilities

government

securities

$1,600

Liabilities:

Checking

accounts

$5000

Required

Reserves

$400

Net Worth

$1,000

Excess

Reserves

$10

Loans

$3900

Total Assets

$5,910

Total

Liabilities

$6,000

d.

The Fed sells $1,500 in government securities to the bank.

Wahoo Bank Balance Sheet

Assets

Liabilities

government

securities

$1,600

Liabilities:

Checking

accounts

$5500

Required

Reserves

$400

Net Worth

$1,000

Excess

Reserves

$150

 

ECON 214

Loans

$4350

Total Assets

$8100

Total

Liabilities

$6,500

4) Using a required reserve ratio of 10% and assuming that banks keep no excess reserves, which

of the following scenarios produces a larger increase in the money supply, explain why.

a) Someone takes $1000 from under his or her mattress and deposits it into a checking account.

Wahoo Bank Balance Sheet

Assets

Liabilities

government

securities

$1,600

Liabilities:

Checking

accounts

$5000

Required

Reserves

$400

Net Worth

$1,000

Excess

Reserves

$100

Loans

$3900

Total Assets

$6000

Total

Liabilities

$6,000

b) The Fed purchases $1,000 in government securities from a commercial bank.

Wahoo Bank Balance Sheet

Assets

Liabilities

government

securities

$2500

Liabilities:

Checking

accounts

$4,000

Required

Reserves

$400

Net Worth

$1,000

Excess

Reserves

$100

Loans

$3,000

Total Assets

$6,000

Total

Liabilities

$5,000

 

ECON 214

5) Using a required reserve ratio of 10% and assuming that banks keep no excess reserves, what

is the value of government securities the Fed must purchase if it wants to increase the money

supply by $2 million

Available solutions