Chapter 14, Problem 1Q

a.

To determine

To classify: The transactions as an asset, liability or neither for each of the players in the money supply process- the Federal Reserve, banks, and depositors.

Explanation of Solution

The nature of the transaction as the player of money supply process is as follows:

For Federal Reserve: It will have no effect on the transaction.

For Banks: The assets of the banks will be unaffected. The liabilities will rise by the loan of $10,000. There will be a decrease in the reserve assets of $10,000. But, the deposit of $10,000 in another bank increases the reserves. So, the assets and liabilities increase by $10,000 but the reserves do not change.

For depositors: The assets will rise by the purchase of automobile of $10,000 and the liabilities will also rise for the depositor as it is a loan.

Economics Concept Introduction

Introduction:

The money supply process refers to the process or a mechanism by which the supply of money and the level of it is determined. There are three players in the money supply which are the Federal Reserve, the banks, and the depositors.

b.

To determine

To classify: The transactions as an asset, liability or neither for each of the players in the money supply process- the Federal Reserve, banks, and depositors.

Explanation of Solution

The nature of the transaction as the player of money supply process is as follows:

For Federal Reserve: The liabilities are unaffected as the reserves increase by $400 and the currency decreases by $400.

For Banks: The assets of the banks will increase as the reserves increase by $400. The liabilities will also increase by $400. This is as the balance of the checking account increases.

For depositors: The assets are unaffected as the checking deposits will increase by $400 and the currency holdings will decrease by $400.

c.

To determine

To classify: The transactions as an asset, liability or neither for each of the players in the money supply process- the Federal Reserve, banks, and depositors.

Explanation of Solution

The nature of the transaction as the player of money supply process is as follows:

For Federal Reserve: The assets will increase by $1,000,000 from the loan amount. The liabilities will increase by $1,000,000 due to the increase in reserves.

For Banks: The assets will increase by $1,000,000 as the reserves are increased. The liabilities will also increase by the same amount as borrowing is made.

For depositors: The depositors will be unaffected as the transaction is in between the Federal Reserve and the bank.

d.

To determine

To classify: The transactions as an asset, liability or neither for each of the players in the money supply process- the Federal Reserve, banks, and depositors.

Explanation of Solution

The nature of the transaction as the player of money supply process is as follows:

For Federal Reserve: It will remain unaffected.

For Banks: The assets and liabilities both of the banks as a whole will be unaffected. But, the balance sheets of the individual banks will change due to the loan.

For depositors: The depositors will remain unaffected from this transaction as one bank borrows loan from the other bank.

e.

To determine

To classify: The transactions as an asset, liability or neither for each of the players in the money supply process- the Federal Reserve, banks, and depositors.

Explanation of Solution

The nature of the transaction as the player of money supply process is as follows:

For Federal Reserve: It will have no effect on the transaction.

For Banks: There will be a change in the balance sheet as the funds are transferred from one bank account to the bank account of the restaurant.

For depositors: The assets will rise by the value of the meal which is $100 and is offset by a fall in assets due to a lower checking account balance of $100.