Money and Banking1. In many casinos, a person buys chips to use for gambling. Within the walls of the casino, these chips can often be used to buy food and drink or even a hotel room. Do chips in a gambling casino serve all three functions of money? 2. A bank has deposits of $400. It holds reserves of $50. It has purchased government bonds worth $70. It has made loans of $300. Set up a T-account balance sheet for the bank, with assets and liabilities, and calculate the bank’s net worth. 3. For the following list of items, indicate if they are in M1, M2, or neither: a. Your $5,000 line of credit on your Bank of America card b. $50 dollars’ worth of traveler’s checks you have not used yet c. $1 in quarters in your pocket d. $1200 in your checking account e. $2000 you have in a money market account 4. Explain why you think the Federal Reserve Bank tracks M1 and M2. 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 100 and equity 30. Monetary Policy 6. The Federal Reserve wants to fight a recession and it conducts a $10 million open market purchase of government bonds. The required reserve ratio (r) is 10 percent. a. What is the largest possible increase in the money supply that could result? Explain. b. What is the smallest possible increase in the money supply that could result? Explain. 7. All other things being equal, by how much will nominal GDP expand if the central bank increases the money supply by $100 billion, and the velocity of money is 3? M*V = P*Y. 8. How is a central bank different from a typical commercial bank? 9. How do the expansionary and contractionary monetary policies affect the quantity of money? 10. Explain how to use quantitative easing to stimulate aggregate demand.
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Homework #6
Money and Banking
1. In many casinos, a person buys chips to use for gambling. Within the walls of the casino, these chips can
often be used to buy food and drink or even a hotel room. Do chips in a gambling casino serve all three
functions of money?
2. A bank has deposits of $400. It holds reserves of $50. It has purchased government bonds
worth $70. It has made loans of $300. Set up a T-account balance sheet for the bank, with assets
and liabilities, and calculate the bank’s net worth.
3. For the following list of items, indicate if they are in M1, M2, or neither:
a. Your $5,000 line of credit on your Bank of America card
b. $50 dollars’ worth of traveler’s checks you have not used yet
c. $1 in quarters in your pocket
d. $1200 in your checking account
e. $2000 you have in a money market account
4. Explain why you think the Federal Reserve Bank tracks M1 and M2.
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
100 and equity 30.
Monetary Policy
6. The Federal Reserve wants to fight a recession and it conducts a $10 million open market purchase of
government bonds. The required reserve ratio (r) is 10 percent.
a. What is the largest possible increase in the money supply that could result? Explain.
b. What is the smallest possible increase in the money supply that could result? Explain.
7. All other things being equal, by how much will nominal GDP expand if the central bank
increases the money supply by $100 billion, and the velocity of money is 3? M*V = P*Y.
8. How is a central bank different from a typical commercial bank?
9. How do the expansionary and contractionary monetary policies affect the quantity of money?
10. Explain how to use quantitative easing to stimulate aggregate demand.

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