Unit 4: Money, Banking and Monetary Policy

Unit 4: Money, Banking and Monetary Policy

Name: ______Date: ______Period: ______

Macroeconomics

Unit 4: Money, Banking and Monetary Policy

Chapter 12: Money, Banking and Monetary Policy

Chapter 13: Money Creation

Chapter 14: Interest Rates and Monetary Policy

  1. Money Banking and Monetary Policy (C.12)

Define/explain and give specific examples of each of the following. Use graphs and/or calculations to enhance your answers.

  1. The Three Functions of Money
  2. The Components of the Money Supply
  3. What “Backs” the Money Supply
  4. The Federal Reserve System
  1. How is it Organized? – Why?

ii. FOMC=Federal Open Market Committee: Who, What, Where, When and Why.

iii. Fed Functions and the Money Supply: Choose the three that you believe are the most important in controlling the Money Supply.

  1. Money Creation (C13)

Define/explain and give specific examples of each of the following. Use graphs and/or calculations to enhance your answers.

  1. How and Why did the Goldsmiths become the first to use “Fractional Reserve Banking”?
  2. Describe the two main characteristics of Fractional Reserve Banking.
  3. A deposit of $200 of currency was made to a checking account. If the reserve ratio is 15% what is the amount of reserves the bank must hold? How much does the bank have in excess reserves to lend out? Use the money multiplier to determine how much the banking system will create from the initial deposit of $200.
  4. Suppose that Continental Bank has the simplified balance sheet shown below and the Reserve Ratio is 20 percent.

AssetsLiabilities and net worth

1 21 2

Reserves$22,000 ______Checkable Deposits$100,000 ______

Securities$38,000 ______

Loans$40,000 ______

i. What is the maximum amount of new loans that this bank can make? Show in column 1 how the bank’s balance sheet will appear after the bank has lent this additional amount.

ii. By how much has the supply of money changed? Explain.

iii. How will the banks balance sheet appear after checks drawn for the entire amount of the new loans have been cleared against the bank? Show the new balance sheet in column 2.

  1. Money Growth and Inflation (C.14)

Define/explain and give specific examples of each of the following. Use graphs and/or calculations to enhance your answers.

  1. Using a supply and demand graph for money, show and explain how equilibrium interest rates are established.
  2. The THREEMonetary Policy Tools used by the Federal Reserve. Explain how the Feds would use the tools to EXPAND the economy. To Contract (Restrict) would be the opposite.

i. Open Market Operations

ii. The Reserve Ratio

iii. The Discount Rate

  1. Describe all aspects of the Federal Funds Rate
  2. The Federal Reserve decreases the Money Supply to contract the economy:

Show on three separate graphs and explain what is happening.

Money Supply graph

Investment demand graph

GDPr and Price Level

e. Describe the effects Monetary Policy can have on a Recession or Inflation.

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