The Demand for Money p Explain the two reasons people demand to hold their wealth in the form on money.
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1 Financial Sector Reading Guide Chapters 13, 14 and 15 Chapter 13: Money and Banking 1. Identify and describe the functions of money. 2. Define money supply and other financial assets. 3. Define and list factors influencing money demand. 4. Explain the role of the Federal Reserve System in the economy. The Functions of Money p List and explain the three functions of money. The Supply of Money p Explain the difference between M1, M2 and M3. The Demand for Money p Explain the two reasons people demand to hold their wealth in the form on money. The Money Market p Draw a properly labeled graph representing the money market 6. Why is Sm represented with a vertical line? 7. What is the price of money? The Federal Reserve and the Banking System p Explain the structure of the Fed including the Board of Governors, the FOMC, and the 12 Fed banks. 8. List and explain the functions of the Fed?
2 Chapter 14: How Banks and Thrifts Create Money 1. Define a fractional banking system 2. Describe the process of money creation and multiple deposit expansion. 3. Given data, determine the size of the money multiplier and asses its impact on the money supply The Balance Sheet of a Commercial Bank p Explain what the balance sheet of a commercial bank shows. Prologue: The Goldsmiths p Explain how a fractional reserve banking system works. A Single Commercial Bank p Suppose the Bank of Wahoo comes into existence with citizens depositing $100,000 in checking accounts at the bank. Draw the bank s balance sheet showing THIS TRANSACITON ONLY. 4. How does this one transaction change the economy s supply of money? (p.267) 5. Suppose that there is a 10% required reserve ratio for the Bank of Wahoo. Given the balance sheet that was created to answer question 3, how much money must the bank keep as required reserves? 6. Given the information in question 5 regarding required reserves, complete the following balance sheet for the Bank of Wahoo. Bank of Wahoo 7. Required reserves are NOT meant to provide for commercial bank liquidity! What is the purpose of required reserves? (p. 269)
3 8. What happens to the money supply when... the bank makes loans? (p. 271) loans are repaid? (p. 272) the bank buys government securities or bonds? (p. 273) 9. Explain why a bank might choose to borrow money in the Federal funds market. (p. 273) The Banking System: Multiple-Deposit Expansion p The reserve requirements for First National Bank is 20%. Suppose that John deposits $100 in First National Bank. Record ONLY this deposit on the balance sheet below. First National Bank 11. Does this $100 deposit alter the money supply? (p. 274) 12. How much of this $100 can First National Bank lend? 13. Suppose that First National Bank loans out ALL of their excess reserves. When the borrower gets the loan, suppose he gives it to someone who deposits it in Second National Bank. Record ONLY this deposit on the balance sheet below. Second National Bank 14. What is the money multiplier formula? Explain how it is used to find the maximum amount of new checkable deposit money that can be created by the banking system. 15. Explain this statement, The monetary multiplier works in both directions. (p. 277)
4 Chapter 15: Monetary Policy 1. Identify and examine the tools of central bank and their impact on money supply and interest rate. Tools of Monetary Policy p What tools can the FED use to influence the banking system s ability to create money? 2. What do open-market operations consist of? 2. When the FED buys securities (government bonds)... (p ) commercial banks reserves Therefore banks will loan And the money supply will 3. When the FED sells securities... (p ) commercial banks reserves Therefore banks will loan And the money supply will 4. When the FED raises the reserve ratio... commercial banks required reserves commercial banks excess reserves will Therefore banks will loan And the money supply will 5. When the FED lowers the reserve ratio... commercial banks required reserves commercial banks excess reserves will Therefore banks will loan And the money supply will 6. Explain who the lender of last resort is. 7. What is the discount rate? 8. When the FED lowers the discount rate... commercial banks reserves Therefore banks will loan And the money supply will
5 9. When the Fed raises the discount rate... commercial banks reserves Therefore banks will loan And the money supply will Monetary Policy, Real GDP, and the Price Level (p ) 10. If the economy is in a recession... the FED should... the problem is. the money supply by... the excess reserves in commercial banks by... securities or... the reserve ratio or... the discount rate. This is an money policy Interest rates will and... Investment spending will and... Aggregate demand will and... Real GDP will. 11. If the economy has inflation the FED should... the money supply by... the excess reserves in commercial banks by... securities or... the reserve ratio or... the discount rate. This is a money policy Interest rates will and... Investment spending will and... Aggregate demand will and... Inflation will. Effectiveness of Monetary Policy p How is monetary policy isolated from political pressure and why is that important?
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