Question

Please state which function of money is being used by each of the following activities: Unit of Account (Standard of Value, Medium of Exchange or Store of Value.  Please explain the reasoning behind each answer.

(a) Brenda puts $600 into her cookie jar for a rainy day.

(b) Brenda records the money she has spent on gasoline this year.   

(c) Brenda buys a $100 Savings Bond.

(d) Brenda uses $2,400 to pay her rent.

2. (4 points)

(a) Please state what assets are part of the money measurement called M1.

(b) Please state what assets are part of the money measurement called M2

3. (8 points) Explain what impact each of the following actions has on M1 and M2 both.

Please give the reasoning for each answer.

(a) Mary puts $400 in cash into her Savings Account.

(b) Sam transfers $40 from his Checking Account into his Savings Account.

(c) Chen takes $60 out of his Savings Account at the ATM machine.

(d) Brenda puts $50 in cash into her cookie jar at home for a rainy day.

4. (3 points)

(a) Assume that a one year bond that has no interest coupon payment with a maturity value (face value) of $2,000 sold for $1,700. Show the interest rate that this bond will pay when it matures.

(b) If the prices of similar bonds are selling next month for $1,900, show the interest rate that these bonds pay when they mature.

(c) Based on your answers in (a) and (b) above, describe the relationship between the price of bonds and the interest rate.

5. (10 points)

Your friend owns a cabin in the mountains in Big Bear California that he inherited from his mother. Your friend likes to visit that cabin during the year whenever he wants to. Thus, he leaves it vacant when he is not there. Your friend says that it is an inexpensive way to have short vacations: visit a place he owns.

Please explain why your friend is wrong in stating that this is an inexpensive way to have short vacations.

6. (3 points)

(a) Please provide a description of Bank Runs.

(b) Explain the main cause of Bank Runs.

(c) Why do you think we no longer see many Bank Runs today.

7. (10 points)

Please explain what backing U.S. Federal Reserve Notes have today and why people accept them for payment for goods and services.

8. (Question 8 has two parts)

Part 1 of Question 8 (12 points)

Below is the Balance Sheet for the Bank of Upland as of October 1, 2017. The required reserve ratio is 5%. Using this information and the Balance Sheet below answer the following questions.

Bank of Upland
Assets	Liabilities
$50 million Home Loans	$900 million Demand Deposits
$200 million Treasury Bonds
$70 million Car Loans
$80 million Business Loans
$100 million Credit Card Loans
$360 million On Deposit at the Fed
$40 million in Vault Cash
$900 million Total Assets	$900 million Total Liabilities

(a) Calculate the Bank of Upland’s Total Reserves as of October 1, 2017 (please show/explain how you got your answer)

b) Calculate the Bank of Upland’s Required Reserves as of October 1, 2017 (please show/explain how you got your answer).

c) Calculate the Bank of Upland’s Excess Reserves as of October 1, 2017 (please show/explain how you got your answer).

d) Determine the amount of Bank of Upland’s Total Reserves which can legally be loaned out as of October 1, 2017 (please show/explain how you got your answer).

e) Calculate the Bank of Upland’s Money Creating Potential throughout the entire Banking System as of October 1, 2017 (please show/explain how you got your answer).

Part 2 of Question 8 (17 points)

Start with the same Balance Sheet and required reserve ratio found in Part 1 above, and using the fact that the Federal Reserve had just sold $120 million worth of Treasury Bonds (T-bonds) to the Bank of Upland at the end of business on October 1, 2017 (no other transaction occurred at the Bank of Upland on October 1, 2017), answer the following questions.

a) Fill in the Bank of Upland’s Balance Sheet numbers as of the start of business on October 2, 2017 for the categories found below. Start with the numbers in Part 1 above and incorporate the fact that the Federal Reserve (using Open Market Operations) had just sold $120 million worth of Treasury Bonds (T-bonds) to the Bank of Upland. Using a Word Table might help.

Bank of Upland
Home Loans	Demand Deposits
Treasury Bonds
Car Loans
Business Loans
Credit Card Loans
On Deposit at the Fed
Vault Cash
Total Assets	Total Liabilities

b) Calculate the Bank of Upland’s Total Reserves as of October 2, 2017 (please show/explain how you got your answer).

c) Calculate the Bank of Upland’s Required Reserves as of October 2, 2017 (please show/explain how you got your answer).

d) Calculate the Bank of Upland’s Excess Reserves as of October 2, 2017 (please show/explain how you got your answer).

e) Calculate the Bank of Upland’s Money Creating Potential throughout the entire Banking System as of October 2, 2017 (please show/explain how you got your answer).

f) Explain the reason the Federal Reserve would Sell these T-bonds to the Bank of Upland and explain what the Federal Reserve is worried about. (In other words, what economic condition is the Fed trying to avoid and how would the bond purchase help the Fed to avoid this economic condition.)You must use numbers that you calculated above to support your answer to receive credit.

g) Explain how the Fed would use two other monetary tools to help support its Open Market Operation above. Explain how these tools would be used and how they would have an impact on the Marcoeconomy.

Answer 1

1.

A.

it is a store of value function, as saving a particular amount will preserve the value of money and it will remain with same purchasing power on the rainy days when it comes after few days. So, value of money is not fluctuating over a period of time.

B.

It is the standard of value of unit of account function, because Brenda is valuing the gasoline consumed in terms of the dollar spent on it. So, money is being used to value the goods, being consumed.

C.

It is the store of value function, because it will preserve the value of money and money will be earning more money when $100 bond is purchased.

D.

It is a medium of exchange, because Brenda uses money to pay the rent. Here, landlord is accepting money as an asset that is good enough as exchange for the rent charges.

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2.

A.

M1 money is the Coin & cash in circulation, currency deposits in checking accounts (or checking deposits) and travelers checks are considered to be the part of M1 money.

B.

M2 money is the sum of  M1 money, saving account deposits, money market funds, certificate of deposits and short term time deposits.

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3.

A

It will decrease M1 money, but M2 will not be affected, as decrease in M1 money decrease is offset by increase in M2 money.

B.

M1 money decreases as Cash is being moved from checking account to saving account. But, M2 money does not Change. As decrease in M1 is compensated by increase in saving deposits of M2.

C.

M1 money increases, but M2 money does not change. It is due to to the reasons that cash is coming from saving account to the in hand for circulation.

D.

M1 and M2, both do not change as money is not changing either account or form.

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