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ECON 214 PROBLEM SET 5

 

1) What are the three functions of money? Which function is the defining characteristic?

 

2) How is the discount rate different from the federal funds rate?

 

3) Consider the balance sheet for the Wahoo bank as presented below. Assets

 

government

 

securities

 

Required

 

Reserves

 

Excess

 

Reserves

 

Loans

 

Total Assets Wahoo Bank Balance Sheet

 

Liabilities

 

Liabilities:

 

Checking

 

$1,600 accounts

 

$400 $4,000 Net Worth $1,000 Total

 

Liabilities $5,000 $0

 

$3,000

 

$5,000 Using a required reserve ratio of 10% and assuming that the bank keeps no excess reserves, write

 

the changes to the balance sheet for each of the following scenarios:

 

a. Bennett withdraws $200 from his checking account.

 

b. The Fed buys $1,000 in government securities from the bank. 4) Using a required reserve ratio of 10% and assuming that banks keep no excess reserves, which

 

of the following scenarios produces a larger increase in the money supply, explain why.

 

a) Someone takes $1000 from under his or her mattress and deposits it into a checking

 

account.

 

b) The Fed purchases $1,000 in government securities from a commercial bank. 5) Using a required reserve ratio of 10% and assuming that banks keep no excess reserves, what

 

is the value of government securities the Fed must purchase if it wants to increase the money

 

supply by $2 million?

 


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