1. Explain the difficulties that an economics professor might face in purchasing a new car under a barter system.

2. Why do people who live in countries experiencing rapid inflation often prefer to hold U.S. dollars rather than their own country's currency? Explain.

3. An alternative version of Gresham's law is that "Bad money drives out good money." Why is it true that, in choosing between different currencies to transact in, good money drives out bad money?

4. Which one of each of the following pairs of assets is most liquid?

a. Microsoft stock or a traveler's check

b. A 30-year bond or a 6-month Treasury bill

c. A certificate of deposit or a demand deposit

d. A savings account or 10 acres of real estate

5. Indicate whether each of the following belongs on the asset or liability side of a bank's balance sheet.

a. Loans

b. Holdings of government securities

c. Demand deposits

d. Vault cash

e. Deposits at the Fed

f. Bank buildings

g. Certificates of deposit

6. Why do you think asking whether money is an asset or a liability is a trick question in economics?

7. Why have ATMs and online banking made savings accounts more liquid than they used to be?

8. Why would the increasing liquidity of savings accounts make some monetary economists track the size of M1 plus savings account balances (called MZM) over time?

9. What would each of the following changes do to M1 and M2?

Change	M1	M2
An increase in currency in circulation	______	______
A decrease in demand deposits	______	______
An increase in savings deposits	______	______
An increase in credit card balances	______	______
A conversion of savings account balances into checking account balances	______	______
A conversion of savings account balances into time account balances	______	______
A conversion of checking account balances into money market mutual funds	______	______

10. Given that the Fed currently imposes reserve requirements on checking deposits, but not on savings deposits, why would banks prefer to hold deposits as savings accounts rather than checking accounts, other things being equal?

11. Since the Fed has begun paying interest on bank reserves at the Fed, do banks still want to avoid holding excess reserves?

12. What would the money multiplier be if the required reserve ratio were

5 percent?	______
10 percent?	______
20 percent?	______
25 percent?	______
50 percent?	______

13. Assume there was a new $100,000 deposit into a checking account at a bank.

a. What would be the resulting excess reserves created by that deposit if banks faced a reserve requirement of

10 percent?	______
20 percent?	______
25 percent?	______
50 percent?	______

b. How many additional dollars could that bank lend out as a result of that deposit if banks faced a reserve requirement of

10 percent?	______
20 percent?	______
25 percent?	______
50 percent?	______

c. How many additional dollars of money could the banking system as a whole create in response to such a new deposit if banks faced a reserve requirement of

10 percent?	______
20 percent?	______
25 percent?	______
50 percent?	______

14. If the required reserve ratio is 10 percent, calculate the potential change in demand deposits under the following circumstances:

a. You take $5,000 from under your mattress and deposit it in your bank.

b. You withdraw $50 from the bank and leave it in your wallet for emergencies.

c. You write a check for $2,500 drawn on your bank (Wells Fargo) to an auto mechanic who deposits the funds in his bank (Bank of America).

15. Calculate the magnitude of the money multiplier if banks were to hold 100 percent of deposits in reserve. Would banks be able to create money in such a case? Explain.

16. Answer the following questions.

a. If a bank had reserves of $30,000 and demand deposits of $200,000 (and no other deposits), how much could it lend out if it faced a required reserve ratio of

10 percent?	______
15 percent?	______
20 percent?	______

b. If the bank then received a new $40,000 deposit in a customer's demand deposit account, how much could it now lend out if it faced a required reserve ratio of

10 percent?	______
15 percent?	______
20 percent?	______

17. Why is the private ownership of the Federal Reserve System essentially meaningless?

18. How is central bank independence related to average inflation rates across countries? How is the Fed insulated from executive branch pressures?

19. Why does the fact that the Fed finances its operations out of interest earned on its portfolio, with the excess returned to the U.S. Treasury, make it more independent of congressional pressure?

20. How does an open market purchase by the Fed increase bank reserves? How does it increase the money supply?

21. Why would the Fed seldom do an open market purchase of government securities at the same time that it raises the discount rate or the required reserve ratio?

22. Why is a reduction in the required reserve ratio such a powerful monetary policy tool? Why is it so seldom used?

23. Why would a reduction in the required reserve ratio not be a powerful tool when banks choose to hold substantial quantities of excess reserves?

24. In which direction would the money supply change if

a. the Fed raised the reserve requirement?

b. the Fed conducted an open market sale of government bonds?

c. the Fed raised the discount rate?

d. the Fed conducted an open market sale of government bonds and raised the discount rate?

e. the Fed conducted an open market purchase of government bonds and raised reserve requirements?