Unit SEVEN - Op

Q2 What is commodity money? What is fiat money? Which kind do we use?

PA2 Your uncle repays a $100 loan from Tenth National Bank (TNB) by writing a $100 check from his TNB checking account. Use T-accounts to show the effect of this transaction on your uncle and on TNB. Has your uncle's wealth changed? Explain.

PA4 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 banks hold 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?

PA5 Happy Bank starts with $200 in bank capital. It then takes in $800 in deposits. It keeps 12.5 percent (18th) of deposits in reserve. It uses the rest of its assets to make bank loans.

1. Show the balance sheet of Happy Bank.
2. What is Happy Bank's leverage ratio?
3. Suppose that 10 percent of the borrowers from Happy Bank default and these bank loans become worthless. Show the bank's new balance sheet.
4. By what percentage do the bank's total assets decline? By what percentage does the bank's capital decline? Which change is larger? Why?