1/ The three functions of money are:
Store of value
Unit of account
Medium of exchange
A US penny satisfies all three functions of money.
A Mexican peso is neither a store of value nor a unit of account in the US as the
peso is not an accepted currency in the US economy for domestic transactions.
A Picasso painting is neither a medium of exchange nor a unit of account
A plastic credit card represents short-term loans and is not fully a medium of
exchange. Nor does it satisfy the other two functions of money.
So the correct answer is Option a.
2/
a) Increase
b) Increase
c) Decrease
d) Increase
e) Decrease
f) Decrease
g) Increase
3/ When uncle repays a $100 loan to the bank from the checking, the result is a
change in the assets and liabilities of both the uncle and TNB.
Uncle:
before: check = 100
after: check = 0
before : loans = 100
after: loans = 0
TNB:
before: loans=100
after loans = 0
before deposits: 100
after: deposits: 0
By paying off the loan, your uncle in the outstanding loan using the assets in his
checking account. Your uncle's wealth has not been changed. He just now has
fewer assets and liabilities.
4/ a) Assets:
_Reserve: $25m
_Loans: $225m
Liabilities: Deposits ($250m)
b) Liabilities: $240m deposits
Assets:
_Loans: $24m
_Reserve: $24m
c) If BSB starts giving out fewer loans, other banks will also cut back on other
loans. Other banks will be short on reserves and interest rates will increase with
the reduced money supply.
d) IF the bank already has loan agreements with other people, it might be hard
to make them pay off their loans fast, especially with fixed rates. It should reduce
the number of loans it gives out, it can sell other assets to gain money, and could
also borrow from the FED as a last resort.
5/ If there are $100 dollars deposited into the system, the total amount of
deposits increases by 1000 since the money multiplier is 1/.10 = 100x10 =1000
The money supply increases by $900 because the $100 deposited into the bank
reduces the money supply by $100, so 1000-100 = 900
6/ a)Assets:
_Reserves: $100
_Loans: $900
Liabilities:
_Bank K: $200
_Deposits: $800
b) Leverage ratio= Assets/Bank K= 1000/200 =5
c) Assets:
_Reserves: $100
_Loans: $810
Liabilities:
_Deposits: $800
_Bank K: 110
Take the OG loans: 900, take 10 percent away= 810 loans
so now, there are only 110 in bank K if 800 deposit stays the same
d) Assets go from 1000 to 910 so there is a 9% decline
Bank’s capital went from 200 to 110 = 45% decline
The change in bank K is larger because it is most likely using other people's
deposits. Also, all of the defaulted loans are covered by bank capital.
7/ The money multiplier could be as high as 1/.1, or 10. This is if the banks have
no excess reserve. So, 10x10= 100mil is the max increase
The smallest amount is just another 10 mil, or the starting amount, if it is just held
as excess reserves since it cannot change.
8/ If 5% for 2000, the max expansion is 2000x1/.05 = 40000 by the money
multiplier. So it should expand more if the Fed buys 2000 worth of bonds. The
fed's deposit generates new money because of the money multiplier while 2000
from the cookie jar is just money that has already been in the money supply.
There is no change to this money once it goes back into the supply.
9/ a) If the Fed sells $1 bonds, the money multiplier is, 1/.1 x1 = 10, so the money
supply will decrease by $10 million and reserves will decrease by $1 since the fed
has sold that money in bonds.
b) Banks may try to hold an excess 5 percent if they need it for any day-to-day
operations such as withdrawals from checking, loans, paying other banks, and
change. It is nice to have the extra money in reserves just to be sure that they will
not run out of money.
There is no change to the total reserve ratio since the excess reserves do not
affect the ratio or the money multiplier. The multiplier does not change so there
is also no change in the money supply.
10/ a) Multiplier: 1/.1 = 10
Supply: 100x10= $1000B
b) 20%: 1/.2= 5 = mult
Supply: 5x100 = $500B
So the supply declines but reserves are unchanged.
11/ a) The fed should buy bonds so that it can put money into the money supply.
b) 20 percent, 40 million
40x1/.2 = 8 million worth in bonds to achieve the goal.
12/ a) $2000
b) Q is still $2000
c) $1000 currency, $1000 demand deposits = $2000
d) 10% = mult: 1/.1 =10 and Q= 2000x10= 20,000