Homework Assignments

Homework Assignments

Assignment 7


o Prompt: Complete the unit homework questions below and submit them.

1. Could each of the following items potentially serve as money? Consider each as a medium of exchange, a unit of account, or a store of value.

A. Visa credit card

B. Federal Reserve note

C. Debit card

D. Picasso painting

2. What backs the U.S. dollar? Include the distinction between commodity money and fiat money in your answer.

3. If you deposit a $20 bill into a checking account and your bank has a 10 percent reserve requirement, by how much will the bank’s excess reserves rise?

4. In what form does a bank hold its required reserves? Assume the Fed has a 20 percent required reserve ratio. What amount of checkable deposits can be supported by $10 million in required reserves?

5. Briefly describe the effect on the money supply of the following monetary policies:

A. The Fed purchases $20 million worth of U.S. Treasury bonds.

B. The Fed increases the discount rate.

C. The Fed decreases the discount rate.

D. The Fed sells $40 million worth of U.S. T-bills.

E. The Fed decreases the required reserve ratio.

6. What are the basic motives for the transactions demand, precautionary demand, and speculative demand? Explain how these three demands are combined in a graph to show the total demand for money.

7. “A monetarist investigator might say that the sewer flow of 6,000 gallons an hour consisted of an average of 200 gallons in the sewer at any one time with a complete turnover of the water 30 times every hour.” Interpret this statement using the equation of exchange.

8. Why is the shape of the aggregate supply curve important to the Keynesian-monetarist controversy? (Hint: Review Exhibit 6 of Chapter 26 in the chapter on aggregate demand and supply.)


9. In Exhibit 15-1, if the required reserve ratio is raised to 15 percent, First Iliad State will have to convert loans worth:


$9,000,000 to required reserves.


$1,500,000 to required reserves.


$500,000 to required reserves.


$1,000,000 to required reserves.

10. If all banks in the system shown in Exhibit 15-5 were identical to Tucker National Bank, the money multiplier for the system would be:

a. 4.

b. 5.

c. 10.

d. 25.

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