Chapter10 | Accounting homework help

Currency held outside banks

$  800

Demand Deposits


Traveler’s Checks


Other checkable deposits


Savings accounts


Money market accounts


Other near monies



a. What is the value of M1?

b. What is the value of M2?

All figures are in billions of dollars.

1.                  Answer the questions below using the following information:

2.                  Explain what near monies are.


3.                  Write out in equation form the four components of M2.

4.                  Explain what happens to the value of M2 if the public makes $1 million worth of cash deposits in the banking system.

5.                  If Bob makes a deposit of $1000 into his checking account at his bank, explain what happens to the value of M1.

6.                  Write out in equation form the four major components of M1.

7.                  Explain what currency debasement is.

8.                  Compare and contrast fiat money and commodity money.

9.                  List and explain the three characteristics of money.

10.              Discuss the role of financial intermediaries in the economy.

11.              Explain the purpose of the Depository Institutions Deregulation and Monetary Control Act.

12.              Explain the difference between commodity monies, fiat money, and legal tender.


1.                  What is transactions money (M1)? Identify the components of transactions money.

2.                  What are the assets of commercial banks and why are the assets?

3.                  What are liabilities of commercial banks and why are they liabilities.

4.                  Define a financial intermediary.

5.                  What was particularly important about the Depository Institutions Deregulation and Monetary Control Act of 1980?

6.                  Explain the money creation process.

7.                  What is money? Explain the three functions that money performs. Which one is the primary function of money?

8.                  Explain why a market structure in which money is used as a medium of exchange is more conducive to the expansion of trade and exchange than a barter system.

9.                  Explain what will happen to the size of both M1 and M2 in each of the following situations:

10.              Assume there is only one bank in Maldavia-The First National Bank. The required reserve ratio is 25%. The First National Bank is loaned up. Use a balance sheet for First National Bank to show the effect of a new deposit of $200 million. Assume there is no leakage from the banking system. What is the value of the money multiplier in Maldavia? By how much does the money supply increase in Maldavia?

11.              The required reserve ratio is 10%. Dollar Bank has $50,000 in deposits and $10,000 in reserves. Assume all other commercial banks are loaned up.

(a) What is the value of this bank’s excess reserves?

(b) What is the value of the additional loans that can be made by the commercial banking system?

(c) What is the money multiplier?

(d) By how many total deposits will be supported by Dollar Bank’s reserves, if this bank lends all its excess reserves and there is no leakage from the banking system?

12.              Suppose that a group of farmers form a cooperative in which they deposit all of their grain in a common warehouse elevator and are given a receipt for their deposits. After a period of time the manager of the cooperative notices that very few farmers are returning to the warehouse to redeem their grain. What do you suppose is going on here? Furthermore, suppose that someone who is not a member of the cooperative decided to borrow some grain but was willing to take a receipt instead of the grain. How is this example similar to the story in the text about the goldsmiths? What would happen if everyone returned to the cooperative to demand their grain all at once.

13.              Explain what bank runs are and why fear serves to reinforce them. Explain where the fear may originate.

14.              In terms of a bank’s or a company’s balance sheet what is meant by the statement that “the books always balance?”

15.              Explain each of the following accounting concepts: assets, liabilities and net worth.

16.              Define bank reserves.

17.              If the required reserve ratio is 20% and a bank has $1 million in demand deposits, how much reserves must the bank keep with the Federal Reserve Bank?

18.              Draw a T-account for a bank and write in the typical items that one would find on either



19.              Assume the Bank of Smithville opens its doors to depositors and receives $100,000 in cash deposits. Assume furthermore that the bank has to abide by a 20% reserve ratio. Could this bank make a loan in the amount of $90,000?

20.              Define excess reserves.

21.              Assume that a banking system starts from scratch with the following characteristics. The first bank has $100 in cash deposits which automatically count as reserves. The banking system has a required reserve ratio of 20% and all banks must lend out their excess reserves. Additionally, a check must be drawn in the full amount of the loan and deposited with another bank. Draw the modified balance sheet for Bank #1 and the balance sheet of the second bank in the process and show what happens to loan creation, reserves and demand deposits. Explain what should happen to the second bank. Below is the balance sheet for Bank #1:

22.              Discuss the monetary multiplier. Assume that the banking system’s total excess reserves total $20 million and that the required reserve ratio is 25%. Calculate the money multiplier and the total potential expansion of the nation’s money supply.

23.              Explain the Federal Open Market Committee of the Federal Reserve System.

24.              Explain the Fed’s function as a lender of last resort.

25.              What is a run on a bank? What safeguards have been instituted to reduce the likelihood of a run on a bank?

26.              Explain what is meant by the money multiplier. Include in your answer a discussion of what variable(s) affects the size of the money multiplier.

27.              Discuss what role banks play in the money creation process.

28.              Explain how the existence of currency and excess reserves would affect the size of the money multiplier.

29.              Suppose banks hold excess reserves. First, what is the opportunity cost of holding excess reserves for the banks? Now assume that the amount of excess reserves held is a decreasing function of the interest rate. Given this assumption, what would the money supply curve look like? Explain.

30.              Assume there is an economy with a single bank, and the central bank sets the reserve requirement ratio at 10%. Assume also that the only bank had no transactions (i.e., no loans, reserves, or deposits) prior to an individual who deposits $1000 of currency with the bank.

(a) As a result of this deposit, calculate the amount of required reserves, actual reserves, and excess reserves.

(b) After the bank has issued the maximum amount of loans, what will be the total amount of loans, deposits, and money in the economy?

(d) If the central bank wants to increase the money supply by $500, should it buy or sell bonds? Also, how many bonds should it buy or sell?

(c) What is the size of the money multiplier for this economy?

31.              Briefly discuss the structure of the Federal Reserve.

32.              Suppose there are $10 million in excess reserves in the banking system and the required reserve ratio is 10% by how much could the money supply expand?

33.              Assume that banks become more conservative and begin to hold excess reserves instead of lending them out. How would the money multiplier in this situation compare to the case where (an amount equivalent to) all excess reserves are lent out? How will this behavior affect the Fed’s behavior.

34.              List the functions of the Federal Reserve.

35.              What is meant by the characterization of Federal Reserve Banks as “banker’s banks?”

36.              Fill in the following table by indicating whether the proposed Federal Reserve action will increase or decrease the money supply. If the action is not a federal reserve power then write not applicable.

37.              Is it true that the Federal Reserve is an independent agency?

38.              Explain how the Federal Reserve clears interbank payments.


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