1. Explain how banks conduct business, earn profits, create money.

2. Explain what positive functions banks and the financial sector perform for society?

3. Explain why banks are unstable.

4. Explain how short-term liabilities create bank instability.

5. Explain how the Federal Reserve helps to stabilize bank instability.

6. List the functions of the Federal Reserve.

7. What is the Federal Open Market Committee and what does it do?

8. What is the difference between the "Federal Funds Rate" and the "Prime Rate"?

9. Using a money market diagram and a bond market diagram explain how the Federal Reserve conducts monetary policy during a recession.

10. How would the Federal Reserve stop inflation?

11.

(a) Draw an AS AD diagram at full employment. Label the AD line "2006". Use the AS AD diagram and show what would happen when (i) consumer confidence decreases, (ii) stock values decrease, and (iii) house values decrease.

(b) Using a money market diagram and a bond market diagram fully explain how the Federal Reserve uses monetary policy to correct the results of 'a' above.

(c) Show the effects of those policies on the AS AD diagram.

(d) Explain why those policies may not work.

12. If the Federal Reserve is buying bonds, then what do you think is happening in the economy? Please explain using the ASAD model and the money and bond market diagrams.