1- What is the difference between commodity money and fiat money? Is there a scenario you can think of that incentivizes individuals to hold commodity money instead of fiat money? 2- Suppose the Fed buys $1 million in Treasury securities from a commercial bank. What effect will this action have on the bank's reserves and the money supply? 3- 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. Further, assume that the bank's capital equals the difference between 'Assets' and 'Liabilities.' Calculate its leverage ratio. 4- List three actions the Fed can take to increase money supply. Briefly discuss why these actions affect money supply in the first place.

1- What is the difference between commodity money and fiat money? Is there a scenario you can think of that incentivizes individuals to hold commodity money instead of fiat money? 2- Suppose the Fed buys $1 million in Treasury securities from a commercial bank. What effect will this action have on the bank's reserves and the money supply? 3- 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. Further, assume that the bank's capital equals the difference between 'Assets' and 'Liabilities.' Calculate its leverage ratio. 4- List three actions the Fed can take to increase money supply. Briefly discuss why these actions affect money supply in the first place.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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23. Identify the four major methods the Fed uses to control the money supply. Give two examples of situations in which the Fed might use one of these methods and explain why that method is best for the given situation.
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1. Which of these is a basic goal of the Federal Reserve System? a. export promotion b. zero interest rates c. a balanced federal budget d. full employment
7. The four major instruments (or tools) of monetary policy are: 1) Open market operations 2) The Discount Rate 3) The reserve ratio 4) Interest on Reserves The Fed uses four major tools to control the reserves of banks and the size of the money supply. 1) The Federal Reserve can buy or sell government securities in the open market to change the lending ability of the banking system: (a) buying government securities in the open market from either banks or the public ( increases, decreases ) the excess reserves of banks; (b) selling government securities in the open market to either banks or the public ( increases, decreases ) the excess reserves of banks. 2) The Fed can raise or lower the reserve ratio: (a) raising the reserve ratio ( increases, decreases ) the excess reserves of banks and the size of the monetary (checkable-deposit) multiplier; (b) lowering the reserve ratio (increases, decreases) the excess reserves of banks and the size of the monetary multiplier. 3) The Fed can…
-The Golden State Bank has total cash reserves of $110,000, deposits of $200,000, and loans of $90,000. The reserve requirement is 5 percent. This bank can make additional loans up to the amount of: $10,000 $5,500 $100,000 $190,000
1. Suppose that a bank’s customer deposits $20,000 in her checking account. The required reserve ratio is 0.125. What are the required reserves on the new deposit? What is the largest loan that the bank can make on the basis of the new deposit? What is the maximum the banking system can increase demand deposits as a result of this deposit? -------------
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