Chapter 14 - Money and Banking

1.What are the three basic functions of money? Describe how rapid inflation can undermine money's ability to perform each of the functions.

2.What are the components of M1, and which is the largest component? Why is the face-value of paper currency greater than its intrinsic value?

3.What backs the money supply in the United States? What determines the value of money? How does the purchasing power of money relate to the price level?

4.Assume that in a country there are the following assets: $700 Federal Reserve Notes in circulation, $400 in money market funds; $300 of corporate bonds; $50 Iron ore deposits; $100 currency in commercial banks; $140 in savings deposits; $1500 in checkable deposits; $100 in small denominated time deposits; and $40 coins in circulation.

a.What is the value of M1 in this country?

b.What is the value of M2 in this country?

5.Suppose that Lady Gaga goes to Las Vegas to play poker and at the last minute her record company says they will reimburse her for 50% of any gambling losses. Will Lady Gaga wager more or less as a result of this offer? What economic concept does this illustrate?

Chapter 15- Money Creation

1.What is the difference between an asset and a liability on a bank's balance sheet?

2.Why is the banking system in the U.S. referred to as fractional reserve banking? What is the role of deposit insurance in this system? Explain how the multiple-deposit expansion leads to increased money supply when banks make loans.

3.Third National Bank has reserves of $20,000 and checkable deposits of $100,0000. The reserve ratio is 15%. Households deposit $5,000 in currency into the bank and that currency is added to the reserves. What is the level of excess reserves of the bank?

4.Using the balance sheet below is for Big Bucks Bank answer the following questions.The reserve ratio is 20%.

a.What is the maximum amount of new loans that this bank can make?

b.By how much has the money supply changed from this initial round of loans?

c.What is the money multiplier if the reserve ratio is 20%, 10%, and 30%.

d.How much will the money supply increase total if the reserve ratio is 10%? 20%? 30%?

Assets

Liabilities and Net Worth

Reserves

22,000

Checkable deposits

100,000

Securities

38,000

Loans

40,000

Chapter 17

1.Define the following terms:

a. Stocks

b. Bonds

c. Arbitrage

d. Diversification

e. Dividend

f. Capital gain

g. Present value

h. Risk-premium

2. Why is it so hard for actively manage funds to generate higher rates of return than passively managed index funds having similar levels of risk? Is there a simple way for an actively managed fund to increase its average rate of return?

3. Identify the following investments as either an economic investmentor a financial investment.

a. A company builds a new factory.

b. A pension plans buys some Google stock.

c. A mining company sets up a new gold mine.

d. A woman buys a 100-year-old farmhouse in the countryside.

e. A man buys a newly built home in the city.

f. A company buys an old factory.

4. Tammy can buy an asset this year for $1,000. She is expecting to sell it next year for $1,050. What is the anticipated percentage rate of return?

5. Suppose that you invest $100 today in a risk-free investment with an annual compounding interest rate of 4%. What will be the value of your investment in 4 years?