Download Financial Sector Reading Guide – Chapters 13, 14 and 15 Chapter

Financial Sector Reading Guide – Chapters 13, 14 and 15
Chapter 13: Money and Banking
Objectives . . .
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.
Questions
The Functions of Money p. 244-245
1. List and explain the three functions of money.
The Supply of Money p. 245-248
2. Explain the difference between M1, M2 and M3.
The Demand for Money p. 251
3. Explain the two reasons people demand to hold their wealth in the form on money.
The Money Market p. 253
5. 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. 254-257
7. 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?
Chapter 14: How Banks and Thrifts Create Money
Objectives . . .
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
Questions
The Balance Sheet of a Commercial Bank p. 265
1. Explain what the balance sheet of a commercial bank shows.
Prologue: The Goldsmiths p. 265-266
2. Explain how a fractional reserve banking system works.
A Single Commercial Bank p. 266-275
3. 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_____________________
Required Reserves___________ Checkable Deposits_________________
Excess Reserves_____________
7. Required reserves are NOT meant to provide for commercial bank liquidity! What is the purpose of
required reserves? (p. 269)
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. 274 – 278
10. 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_____________________
Required Reserves___________ Checkable Deposits_________________
Excess Reserves_____________
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_____________________
Required Reserves___________ Checkable Deposits_________________
Excess Reserves_____________
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)
Chapter 15: Monetary Policy
Objectives . . .
1. Identify and examine the tools of central bank and their impact on money supply and interest rate.
Questions
Tools of Monetary Policy p. 284 – 290
1. 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. 284-285)

commercial banks’ reserves ___________________________

Therefore banks will loan _____________________________

And the money supply will_____________________________
3. When the FED sells securities . . . (p. 286-287)

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_____________________________
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. 291 – 294)
10. If the economy is in a recession . . .

the problem is _________________________.
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 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. 294 – 298
12. How is monetary policy isolated from political pressure and why is that important?