Question

A. The discount window and the federal funds market The discount rate is the interest rate the Fed charges on loans of reserves to banks. The federal funds rate is the interest rate banks charge for overnight loans of reserves to other banks. Which of the following statements about the discount rate and the federal funds rate are true?

Check all that apply

A.). A lower discount rate discourages banks from borrowing reserves and making loans.

B.) Usually, banks borrow from the federal funds market rather than the discount window.

C. If the Fed wants to expand the money supply, it can reduce the discount rate.

D.) If the federal funds rate is higher than the discount rate, banks may borrow from the discount window

B. The roles of money

Alex is heading out to lunch. He goes to the bank and withdraws $30 from his savings account. He heads to a local deli that sells half sub sandwiches for $4.99 and whole subs for $7.99. Alex decides that he's pretty hungry and goes for the whole. He pays with a $10 bill and tells the cashier to keep the change.

Identify what role money plays in each of the following parts of the story.

Hint: Select each role only once.

Role of Money	Medium of Exchange	Unit of Account	Store of Value
Alex can easily determine that the whole sandwich, while twice as long as the half, is priced at less than twice as much.
Alex accumulates money in his savings account for future purchases.
Alex buys his lunch with a $10 bill.

C. Required and excess reserves

Suppose that Best National Bank currently has $200,000 in checkable deposits and $130,000 in outstanding loans. The Federal Reserve has set the reserve requirement at 10%. Using these values, fill in the empty cells for reserves, required reserves, and excess reserves in the following table.

Best National
Reserves	Required Reserves	Excess Reserves
(Dollars)	(Dollars)	(Dollars)

Answer 1

(A)

Following statements about the discount rate and the federal funds rate are true -

1. Usually, banks borrow from the federal funds market rather than the discount window.

2. If the Fed wants to expand the money supply, it can reduce the discount rate.

3. If the federal funds rate is higher than the discount rate, banks may borrow from the discount window.

Hence, the correct answer is the option (B), (C), and (D).

(B)

When money is used to compare the relative price it acts as unit of account.

When money is saved for future purposes then it acts as store of value.

When money is used to buy goods and services, it acts as the medium of exchange.

Following is the complete table -

Alex can easily determine that the whole sandwich, while twice as long as the half, is priced at less than twice as much.	Unit of account
Alex accumulates money in his savings account for future purchases.	Store of value
Alex buys his lunch with a $10 bill.	Medium of exchange

(C)

Checkable deposits = $200,000

Reserve requirement = 10% or 0.10

Calculate the required reserves -

Required reserves = Checkable deposits * Reserve requirement

Required reserves = $200,000 * 0.10 = $20,000

Calculate the excess reserves -

Excess reserves = Checkable deposits - Required reserves - Loans

Excess reserves = $200,000 - $20,000 - $130,000 = $50,000

Calculate the reserves -

Reserves = Required reserves + Excess reserves = $20,000 + $50,000 = $70,000

Following is the complete table -

Reserves	Required reserves	Excess reserves
$70,000	$20,000	$50,000