1) What are the three functions of money? Which function is the most important?
A. Money serves as a medium of exchange, as a store of value, and as a unit of account.
B. Money's most important function is as a medium of exchange to facilitate transactions.
2) How is the discount rate different from the federal funds rate?
The discount rate is the interest rate that the Fed charges banks when it lends the bank money. The federal funds rate is the interest rate that banks charge other banks
3) Consider the balance sheet for the Wahoo bank as presented below
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Wahoo Bank Balance Sheet
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Assets
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Liabilities
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government securities
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$1,600
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Liabilities: Checking accounts
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$4,000
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Required Reserves
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$400
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Net Worth
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$1,000
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Excess Reserves
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$0
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Loans
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$3,000
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Total Assets
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$5,000
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Total Liabilities
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$5,000
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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 $500 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 $4 million?