Econ 201

Homework 6

12 Points Name: ________________________

Homework is due on Monday, April 22nd

1. The following is a quotation from Aristotle about money; “Everything, than, must be assessed in money; for this enables men always to exchange their services, and make society possible”. What functions of money are found in this statement from more than 2,500 years ago? (1 point)

2. Is money the only store of value? If not, give some other examples of stores of value. Must money be a store of value to serve its function as a medium of exchange? (1 point)

3. Identify whether each of the following items is counted in M1, M2, both M1 and M2, or MZM or neither. (3 points)

a. A $100,000 certificate deposit issued by a New York bank.

d. A $10,000 deposit an elderly widow holds in her savings account.

c. A $50 traveler’s check.

d. A $50,000 money market deposit account balance

e. Your Citibank Platinum Master Card

4. Following the balance sheet for The First National Bank (5 points)

The First National Bank

Assets Liabilities

Total reserves: ________ Deposits: $500,000

Required reserves: $20,000

Excess reserves: $80,000

Loans: $ 400,000

Total Assets: $500,000 Total liabilities $500,000

a. What is the required reserve ratio? Show your calculation

b. What are the bank total reserves? Show your calculation

c. How much can the First National Bank safely lend out?

d. What is the value of the simple money (deposit) multiplier? Find the value. What does it tell us?

e. What is the maximum increase in deposits and the money supply by the banking system?

5. “When a bank creates loans, it does not create money” True or false. Explain your answer (1 point)

TRUE ( ) FALSE ( )

6. The Happy Bank receives an extra $1,000 of reserves but decides not to lend any of these reserves out. How much deposit creation takes place for the entire banking system? Explain your answer. (1 point)

TRUE ( ) FALSE ( )

Extra Points (4 points)

1. What must be the characteristics of a purely electronic substitute for cash if most people are to stop using currency? (1 point)

2. Was money a better store of value in the United States in the 1950s than it was in the 1970s? Why or why not? In which period would you have been willing to hold money? Why? (1 point)

3. Milton Friedman believed that the Fed should control the money precisely. In the 1960s, he proposed that the required reserve ratio be raised to 100 percent.

· How would this policy improve the Fed control of the money supply?

· What are the drawbacks to the policy? Explain


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