ECON 214 Problem Set 5

Liberty ECON 214 Problem Set 5 Answers

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

 

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

 

  • 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:

  1. Bennett withdraws $200 from his checking account.
  2. The Fed buys $1,000 in government securities from the bank.

 

 

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.

  1. a) Someone takes $1000 from under his or her mattress and deposits it into a checking account.
  2. b) The Fed purchases $1,000 in government securities from a commercial bank.

 

 

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?

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