Ch. 13 Homework

What is meant by the statement "illiquid"? List some things you own and rank them most to least illiquid.

A liquid asset is one that can easily be transformed into money without experiencing loss of market value. Real Estate, business, equipment, and artistic works are illiquid.

If you withdraw $100 how does this affect the reserves of your bank?

Bank reserves decrease by $100.

If you withdraw $100 how does this affect the excess reserves of your bank?

Excess reserves decrease by $100.

How will a purchase by the Fed of $100 million in the US securities from a commercial bank affect the money supply?

It will increase it.

How will a reduction in discount rate affect the money supply

It will increase it.

How will the sale of the US treasury of $100 million in newly issued bonds to a commercial bank affect the money supply?

It will leave money supply unchanged.

How will a sale by the Fed if $200 million in US securities to private investor affect the money supply?

It will reduce it.

How will an increase in Reserve requirements affect the money supply?

It will reduce it.

How will an increase in the discount rate affect the money supply?

It will reduce it.

What makes money valuable? Does money perform an economic service? Explain. Could money perform its function better if there were twice as much of it? Why or why not?

Money is valuable because of its scarcity relative to the availability of goods and services. The use of money facilitates transactions. Money also serves as a store of value and unit if account.

If the Fed wants to expand the money supply, why is it more likely to do so by purchasing bonds and other financial assets rather than by lowering reserve requirements?

The money supply can be chnage by open markets. Open market operations are a fine-tuning method.

If the Federal Reserve doesn't take any action, what would happen to the supply of money if the general public decided to increase it's holdings of currency and decrease its checking deposits by an equal amount?

The transformation of deposits into currency does not directly affect the money supply, it does reduce the excess reserves of banks. The reduction in excess reserves will cause banks to reduce their loans and shrink the money supply.

If you withdraw $100 how does this affect the supply of money?

There is no change.