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Chapter 12. Money, Banking & the Financial System: Pre-Class & ln-Class Activities Packet NameIlD. Number: Section: Date: Part 3. Discussion Questions and Problems 1. People
Chapter 12. Money, Banking & the Financial System: Pre-Class & ln-Class Activities Packet NameIlD. Number: Section: Date: Part 3. Discussion Questions and Problems 1. People in a barter economy came up with the idea of money because they wanted to do something to make society better off. Do you agree or disagree with this statement? Explain. . Money makes trade easier. Would having a money supply twice as large as it is currently make trade twice as easy? Would having a money supply half its current size make trade half as easy? . Money is a means of lowering the transaction costs of making exchanges. Do you agree or disagree? Explain. . Can Ml fall as M2 rises? Can Ml rise without M2 rising too? Explain. . Why isn't a credit card money? . Explain the process by which goldsmiths could increase the money supply. . What is a nancial system, and why would a country with a well-developed and fully functionally nancial system be better off than a country without it? . Identify each of the following as either an adverse selection or a moral hazard problem: a. Poor drivers apply for car insurance more than good drivers. b. The federal government promises to help banks that get into nancial problems. c. The federal government insures checkable deposits (promises to repay the holder of the checkable deposit if the bank fails). . Explain how nancial intermediaries help to solve adverse selection and moral hazard problems when it comes to lending and borrowing. 10. Explain the difference between a bank's loans and its borrowings. Chapter 12. Money, Banking and The Financial System : Pre- Class & ln-Class Activities Packet Name] ID. Number: Section: Date: Part 4. Economic Equations and Graphs 1. Checkable or Demand deposits (DD) are $50 million. and required reserves 6. If currency held outside banks is $200 billion and M1 is $600 billion, do we (RR) are $4 million. What is the required reserve ratio (r) ? 2. r is 9 percent, RR are $10 million, and (total) reserves (R) are $50 million. What do excess reserves (ER) equal? What do DD equal? 3. A bank's assets are $90 million, and its liabilities are $71 million. Its assets increase by 10 percent, and its liabilities increase by 6 percent. What is the percentage change in the bank's capital, or net worth? 4. A bank currently has $100 million DD, $4 million in reserves, and $8 million in securities. If the r is 10 \"/0, is the bank meeting its legal R? Explain. 5. Currency held outside banks is $400 billion, DD are $350 billion, travelei's checks (TC) are $2 billion, and money market mutual funds (retail) are $100 billion. What does M1 equal? know for sure what Checkable Deposits (DD) equal? Whylwhy not? 7. Currency held outside banks is $100 billion, money market mutual funds (retail) are $120 billion, small-denomination time deposits are $50 billion, and savings deposits (including money market deposit accounts) are $200 billion. What does M2 equal? 8. If checkable deposits are $20 million and the required reserve ratio is 15 percent, what do required reserves (RR) equal? 9. If excess reserves are $2 million and required reserves are $22 million, what do reserves (R) equal? 10. If bank deposits at the Fed equal $40 million and reserves (R) equal $43 million, what does vault cash equal
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