1. Which of the following are considered money in the U.S. economy? Which are not? Explain your answers by discussing each of the three functions of money

A. A U.S. penny

B. A Mexican peso

C. A Picasso painting

D. A plastic credit card

2. What are demand deposits and why should they be included in the stock of money?

3. What are reserve requirements? What happens to the money supply when the fed raises reserve requirements?

4. Explain whether each of the following events increases or decreases the money supply.

A. The fed buys bonds in open-market operations

B. The fed reduces the reserve requirement

C. The fed increases the interest rate it pays on reserves

D. Citibank repays a loan it has previously taken from the fed

E. After a rash of pickpocketing, people decide to hold less currency

F. Fearful of bank runs, bankers decide to hold more excess reserves

G. The FOLOC increase its target for the federal funds rate

5. Beleaguered State Bank (BSB) holds $250 million in deposits and maintains a reserve ration of 10 per- cent.

Show a T-account for BSB

Now suppose that BSB's largest depositor withdraws $10 Million in cash from her account and the BSB decides to restore its reserve ration by reducing the amount of loans out- standing. Show its new T-account.

Explain what effect BSB's action will have on other banks.

Why might it be difficult for BSB to take the action described in part (b)? Discuss another way for BSB to return to its original reserve ration.

6. You take $100 you had kept under your mattress and deposit it in your bank account. IF this $100 stays in the banking system as reserves and if the banks holds reserves equal to 10 percent of deposits, by how much does the total amount of deposits in the banking system increase? By how much does the money supply increase?

7. The Fed conducts a $10 million open-market purchase of government bonds. If the required reserve ratio is 10 percent, what are the largest and smallest possible increases in the money supply that could result? Explain.

8. Assume that the reserve requirement is 5 percent. All other things being equal, will the money supply expand more if the Fed buys $2,000 worth of bonds or if someone deposit in the bank $2,000 that she had been hiding in her cookie jar? If one of these actions creates more money than the other, how much more does it create? Support your thinking.

9. Suppose that the reserve requirement for checking deposits is 10 percent and that the banks do not hold any excess reserves.

a. If the fed sells $1 million of government bonds, what is the effect on the economy's reserves and money supply?

b. Now suppose that the Fed lowers the reserve requirement to 5 percent but that banks choose to hold another 5 percent of deposits as excess reserves. Why might banks do so? What is the overall change in the money multiplier and the money supply as a result of these actions?

10. Assume that the reserve requirement is 20 percent. Also assume that banks do not hold excess re- serves and that the public does not hold any cash. The fed decides that it wants to expand the money supply to $40 million.

a. If the Fed is using open-market operations, will it buy or sell bonds?

b. What quantity of bonds does the Fed need to buy or sell to accomplish this goal? Explain your reasoning.

11. The economy of Elmendyn contains 2,000 $1 bills.

If people hold all money as currency, what is the quantity of money?

If people hold all money as demand deposits and banks maintain 100 percent reserves, what is the quantity of money?

If people hold equal amounts of currency and demand deposits and banks maintain 100 percent reserves, what is the quantity of money?

If people hold all money as demand deposits and banks maintain a reserve ratio of 10 percent, what is the quantity of money?

If people hold all money as demand deposits and banks maintain a reserve ratio of 10 percent, what is the quantity of money?