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Exam 29: The Monetary System

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Question 41

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You saved $500 in currency in your piggy bank to purchase a new laptop. The $500 you kept in your piggy bank illustrates money's function as a _______. The laptop's price is posted as $500. The $500 price illustrates money's function as a _____. You use the $500 to purchase the laptop. This transaction illustrates money's function as a ______.

A) store of value, medium of exchange, unit of account
B) store of value, unit of account, medium of exchange
C) medium of exchange, unit of account, store of value
D) medium of exchange, store of value, unit of account

E) A) and B)
F) All of the above

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Question 42

Multiple Choice

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The discount rate is

A) the interest rate the Fed charges banks.
B) one divided by the difference between one and the reserve ratio.
C) the interest rate banks receive on reserve deposits with the Fed.
D) the interest rate that banks charge on overnight loans to other banks.

E) B) and D)
F) C) and D)

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Question 43

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U.S. dollars are an example of commodity money and hides used to make trades are an example of fiat money.

Trace the effects on the money supply when the Fed decreases the discount rate.

When the Soviet Union began breaking up in the late 1980s, cigarettes began replacing the ruble as the medium of exchange even though the ruble was legal tender. The cigarettes provide an example of commodity money.

Suppose a bank has $3,000 in reserves, $25,000 of deposits, and a 10 percent reserve requirement. What is the amount of excess reserves?

In the months of November and December, people in the United States hold a larger part of their money in the form of currency because they intend to shop and travel for the holidays. As a result, other things the same, the money supply increases.

Marc puts prices on surfboards and skateboards at his sporting goods store. He is using money as a unit of account.

If the reserve requirement is 10 percent, which of the following pairs of changes would both allow a bank to lend out an additional $10,000?

Suppose a bank is operating with a leverage ratio of 20. What is the maximum decrease in the market value of assets before the bank becomes insolvent?

List two reasons why the Fed can not control the exact size of the money supply.

Designers of the Federal Reserve System were concerned that the Fed might form policy favorable to one part of the country or to a particular party. What are some ways that the organization of the Fed reflects such concerns?

Table 29-3 ​ $\begin{array}{l}\text { The First Bank of Rosw ell }\\\begin{array} { l l | l l } & \text { Assets } & { \text { Liabilities } } \\\hline \text { Reserves } & \$ 30,000 & \text { Deposits } & \$ 200,000 \\\text { Loans } & 170,000 & &\end{array}\end{array}$ ​ ​ ​ -Refer to Table 29-3. If the bank faces a reserve requirement of 6 percent, then the bank

Table 29-2 The information in the following table pertains to the hypothetical economy of Florencial. ​ $\begin{array} { | c | c | } \hline \text { Type of Money } & \begin{array} { c } \text { Amount } \\\text { (Billions of dollars) }\end{array} \\\hline \text { Large time deposits } & 120 \\\hline \text { Small time deposits } & 80 \\\hline \text { Demand deposits } & 300 \\\hline \text { Other checkable deposits } & 50 \\\hline \text { Savings deposits } & 65 \\\hline \text { Traveler's checks } & 5 \\\hline \text { Money market mutual funds } & 200 \\\hline \text { Currency } & 150 \\\hline \text { Credit card balances } & 300 \\\hline \text { Miscellaneous categories of M2 } & 30 \\\hline\end{array}$ -Refer to Table 29-2. What is the M1 money supply in Florencial?

A bank operates with reserves of $100, loans of $300 and securities of $100. The bank's only liability is deposits of $400 since it has zero debt. Calculate the bank's leverage ratio.

What is bank insolvancy?

Describe the two things that limit the precision of the Fed's control of the money supply and explain how each limits that control.

The prices of goods at a grocery store are listed in dollars. Which function of money does this illustrate?

During the early 1930s there were a number of bank failures in the United States. What did this do to the money supply? The New York Federal Reserve Bank advocated open market purchases. Would these purchases have reversed the change in the money supply and helped banks? Explain.

The federal funds rate is a long-term interest rate banks charge one another for loans.