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Understanding Money: Commodity vs Fiat, Federal Reserve, Exercises of Macroeconomics

National Economics University (NEU)Macroeconomics

An in-depth analysis of the concepts of money and wealth, the functions of money, and the differences between commodity money and fiat money. It also covers the role of the federal reserve as a lender of last resort and the impact of reserve ratios on money supply. Students will gain a solid understanding of monetary policy and the role of banks in the economy.

Typology: Exercises

2019/2020

Uploaded on 02/28/2022

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1. What is the difference between money and wealth?
- Money is the set of assets in the economy that people regularly use to buy goods and services from each
other.
- Wealth refers to the total of all stores of value, including both money and nonmonetary assets.
2.
WhichofthethreefunctionsofmoneyarecommonlymetbyeachofthefollowingassetsintheU.S.
economy?
paperdollar
preciousmetals
collectiblessuchasbaseballcards,stamps,andantiques
a. medium of exchange, store of value, unit of account
b. store of value
c. store of value
3. Arecreditcardsanddebitcardsmoney?What'sthedifferencebetweencreditanddebitcards?
Neither credit cards nor debit cards are money, but credit cards are very different from debit cards. Credit
cards are not a medium of exchange, but are a means of deferring payment. Debit cards allow the user
immediate access to deposits in a bank account. These deposits are part of the money supply.
4.
Whatisthedifferencebetweencommoditymoneyandfiatmoney?Whydopeopleacceptfiatmone
yintradeforgoodsand services?
Commodity money has "intrinsic value," or value in uses other than as money. Fiat money is established
as money by the government. It has very little, if any, intrinsic value. Although fiat money has no
intrinsic value, people accept it in trade when they are confident that others will also accept it. The
government's decree that fiat currency serves as legal tender increases this confidence.
5.
Whatismeantbytheterm"lenderoflastresort"?InwhatcircumstancesmighttheFedbealende
roflastresort?
A "lender of last resort" is a lender to those who cannot borrow anywhere else. The Fed might loan funds
to a solvent bank that is experiencing a bank run and so doesn't currently have enough cash on hand to
meet depositors' demands.
6.
Ifthereserveratiois20percent,howmuchmoneycanbecreatedfrom$100ofreserves?Showyou
rwork.
Reserve ratio = 20%
pf3
pf4

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Download Understanding Money: Commodity vs Fiat, Federal Reserve and more Exercises Macroeconomics in PDF only on Docsity!

  1. What is the difference between money and wealth?
  • Money is the set of assets in the economy that people regularly use to buy goods and services from each other.
  • Wealth refers to the total of all stores of value, including both money and nonmonetary assets.

Which of the three functions of money are commonly met by each of the following assets in the U.S. economy?  paper dollar  precious metals  collectibles such as baseball cards, stamps, and antiques a. medium of exchange, store of value, unit of account b. store of value c. store of value

  1. Are credit cards and debit cards money? What's the difference between credit and debit cards? Neither credit cards nor debit cards are money, but credit cards are very different from debit cards. Credit cards are not a medium of exchange, but are a means of deferring payment. Debit cards allow the user immediate access to deposits in a bank account. These deposits are part of the money supply.

What is the difference between commodity money and fiat money? Why do people accept fiat mone y in trade for goods and services? Commodity money has "intrinsic value," or value in uses other than as money. Fiat money is established as money by the government. It has very little, if any, intrinsic value. Although fiat money has no intrinsic value, people accept it in trade when they are confident that others will also accept it. The government's decree that fiat currency serves as legal tender increases this confidence.

What is meant by the term "lender of last resort"? In what circumstances might the Fed be a lende r of last resort? A "lender of last resort" is a lender to those who cannot borrow anywhere else. The Fed might loan funds to a solvent bank that is experiencing a bank run and so doesn't currently have enough cash on hand to meet depositors' demands.

If the reserve ratio is 20 percent, how much money can be created from $100 of reserves? Show you r work. Reserve ratio = 20%

Money multiplier = 1/reserve ratio = 1/0. Money Supply Created = 100 * (1/0.20) = 500.

  1. Draw a simple T account for First National Bank which has $5,000 of deposits, a required reserve ratio of 10 percent , and excess reserves of $300. Make sure your balance sheet balances. First National Bank Assets Liabilities Reserves Loan

Deposits $

  1. Suppose that in a country the total holdings of banks were as follows: required reserves = $ million; excess reserves = $15 million; deposits = $750 million; loans = $600 million. Treasury bonds = $90 million. Show that the balance sheet balances if these are the only assets and liabilities. Assuming that people hold no currency, what happens to each of these values if the central bank changes the reserve requirement ratio to 2%, banks still want to hold the same percentage of excess reserves, and banks don’t change their holdings of Treasury bonds? How much does the money supply change by? The only liability is deposits which equal $750 million. Total reserves are $60 billion which summed with loans, $600 million, and Treasury bonds $90 million = $750. Since liabilities equal assets, the balance sheet balances. If the bank changes the reserve requirement ratio to 2%, required reserve will be $15 million, thus, change the amount of loan to $630 million. Money supply doesn’t change.
  2. Describe the two things that limit the precision of the Fed's control of the money supply and explain how each limit that control. The first problem is that the Fed does not control the amount of money that households choose to hold as deposits in banks. The more money households deposit, the more reserves banks have, and the more money the banking system can create. The less money households deposit, the less reserves banks have, and the less money the banking system can create. To see why this is a problem, suppose that one day people lose confidence in the banking system and withdraw some of their deposits to hold more currency. When this happens, the banking system loses reserves and creates less money. The money supply falls, even without any Fed action. The second problem of monetary control is that the Fed does not control the amount that bankers choose to lend. When money is deposited in a bank, it creates more money only when the bank loans it out. Because banks can choose to hold excess reserves instead, the Fed cannot be sure how much money the banking system will create. For instance, suppose that one day bankers become more cautious about economic conditions and decide to make fewer loans and hold greater reserves. In this case, the banking system creates less money than it otherwise would. Because of the bankers’ decision, the money supply falls.

Bank regulators require banks to hold a certain amount of capital. The goal of such a capital requirement is to ensure that banks will be able to pay off their depositors (without having to resort to government- provided deposit insurance funds). The amount of capital required depends on the kind of assets a bank holds. If the bank holds safe assets such as government bonds, regulators require less capital than if the bank holds risky assets such as loans to borrowers whose credit is of dubious quality.