ECON 214 Problem Set 5
Liberty ECON 214 Problem Set 5 Answers
- What are the three functions of money? Which function is the defining characteristic?
- How is the discount rate different from the federal funds rate?
- 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:
- Bennett withdraws $200 from his checking account.
- 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?