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.

Wahoo Bank Balance Sheet
Assets Liabilities
government securities $1,600 Liabilities: Checking accounts $4,000
Required Reserves $400 Net Worth $1,000
Excess Reserves $0
Loans $3,000
Total Assets $5,000 Total Liabilities $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. Roland deposits $500 into his checking account.

c. The Fed buys $1,000 in government securities from the bank.

d. The Fed sells $1,500 in government securities to 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?