Answers to Homework #6

Topics: Money, Federal Reserve System, Monetary policy Pages: 4 (951 words) Published: May 9, 2012
The questions below draw on the material in Chapter 11 and the associated lecture material. 1. What distinguishes money from other assets in the economy? Money is the most liquid asset.
2. What is commodity money? What is fiat money? Which kind do we use? Commodity money may be used for other purposes. Fiat money is useful only as money.
3. What are demand deposits? Why should they be included in the stock of money? Demand deposits are balances in bank accounts that can be accessed on demand by writing a check. They are money, since they are generally accepted as a medium of exchange.

4. Which of the following are money in the U.S. economy? Which are not? Explain your answers by discussing each in terms of the three functions of money. a. a U.S. penny
Money, because it’s a medium of exchange and it serves as a store of value and a unit of account
b. a Mexican peso
Not money in U.S. economy, because it is not used as medium of exchange or unit of account in United States; could serve as store of value. c. a Picasso painting
Not money, because it cannot be used as medium of exchange or unit of account, but it could be a store of value.
d. a credit card
Not money; it is an instrument of short-term borrowing. It is not really a medium of exchange, nor is it a store of value.
e. a debit card
A debit card allows instantaneous access to funds in a bank account. Thus, a debit card functions the same way that a check does, only faster. While the debit card itself may not be money, the account balances that lie behind a debit card are included as a measure of the money supply (which?). Such accounts could serve as a store of value.

5. Consider the following simplified T account of a commercial bank: ASSETS LIABILITIES
Vault cash $200 $3500 Deposits
Deposits at the
Federal Reserve $300
Loans $3000
The required reserve ratio is 10 percent.
a. Find Actual Reserves, Required Reserves, and Excess Reserves. AR = 200 + 300 = $500
RR = 0.1 x 3500 = $350
ER =...
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