Macroeconomics
Money, Banking, Monetary Policy, Bank Regulation, Exchange Rates, & International Capital Flows
Answer the following based on chapters 14, 15, and 16 of OpenStax. Ensure that any formulas used are clearly shown by either using a formula in Excel or writing the formula out—as you would for a math class.
Question Point Value
1 10
2 10
3 10
4 10
5 10
6 10
7 10
8 10
9 10
Bonus (no question) 10
Total 100
Question 1
Graph data from the Federal Reserve’s website (http://www.FederalReserve.gov/) on the M1 and M2 stock for the past 24 months.
Question 2
Answer the following questions about money.
a) Explain the basic functions of money.
b) Compare and contrast the types of money.
c) What is the difference between M1 and M2? Why aren’t M1 and M2 just combined?
Question 3
Answer the following questions about the Federal Reserve.
a) What are the 5 functions of a central bank?
b) Describe the structure of the Fed. How is the Fed organized geographically? What is the process of appointing people to the Fed?
c) What powers does the Fed have? What do each of these powers do?
Question 4
Answer the following questions.
a) The total amount of U.S. currency in circulation divided by the U.S. population comes out to about $3,500 per person. That is more than most of us carry. Where is all the cash?
b) Explain the positive (benefits) and negative (costs) aspects of a requirement that banks hold 100% of their deposits as reserves? Would this be feasible in the U.S.?
c) Explain what would happen if banks were notified they had to increase their required reserves by one percentage point from, say, 9% to10% of deposits. What would their options be to come up with the cash?
Question 5
Suppose the Fed conducts an open market purchase by buying $10 million in Treasury bonds from Acme Bank. Sketch out the balance sheet changes that will occur as Acme converts the bond sale proceeds to new loans. The initial Acme bank balance sheet contains the following information: Assets – reserves 30, bonds 50, and loans 50; Liabilities – deposits 300 and equity 30.
Question 6
Suppose the Fed conducts an open market sale by selling $10 million in Treasury bonds to Acme Bank. Sketch out the balance sheet changes that will occur as Acme restores its required reserves (10% of deposits) by reducing its loans. The initial balance sheet for Acme Bank contains the following information: Assets – reserves 30, bonds 50, and loans 250; Liabilities – deposits 300 and equity 30.
Question 7
Answer the following questions.
a) All other things being equal, by how much will nominal GDP expand if the central bank increases themoney supply by $100 billion, and the velocity of money is 3?
b) Suppose now that economists expect the velocity of money to increase by 50% as a result of the monetary stimulus. What will be the total increase in nominal GDP?
c) If GDP is 1,500 and the money supply is 400, what is velocity?
d) If GDP now rises to 1,600, but the money supply does not change, how has velocity changed?
e) If GDP now falls back to 1,500 and the money supply falls to 350, what is velocity?
Question 8
Answer the following questions regarding Exchange Rates and International Capital Flows.
a) Suppose a country has an overall balance of trade so that exports of goods and services equal imports of goods and services. Does that imply that the country has balanced trade with each of its trading partners?
b) What does it mean to hedge a financial transaction?
c) What does it mean to say that a currency appreciates? Depreciates? Becomes stronger? Becomes weaker?
Question 9
A British pound cost $1.56 in U.S. dollars in 1996, but $1.66 in U.S. dollars in 1998.
a) Was the pound weaker or stronger against the dollar?
b) Did the dollar appreciate or depreciate versus the pound?
c) Calculate the cost of a U.S. dollar in terms of British pounds in 1996 and 1998.