MGMT673 Week 3 Problem Set

1. List the 4 functions of money and provide an everyday example of each.

2. For each of the following transactions, place an X in the table to indicate whether direct or indirect financing is utilized:

3. Define M1 and M2

4. The following questions address money creation in the banking system. Assume the required reserve ratio is 10%.

a. Define bank reserves in the US banking system.

b. A large bank’s liabilities include $1 billion ($10⁹) in checkable deposits. What are the Required Reserves?

c. The same bank has assets that include $100 million in vault cash and $1 billion on deposit at the Federal Reserve Bank. What are the excess reserves, if any?

d. What is the theoretical money multiplier? Show the computation.

e. A bank has $100 million in excess reserves that it wishes to lend. Through the lend-spend-deposit cycle, by how much could the money supply theoretically expand?

f. List 3 reasons the actual money multiplier will be less than the theoretical maximum.

5. Go once again to FRED (St Louis Federal Reserve Bank). Find the graph for M1 money multiplier (search within FRED).

a. What has been the trend for the money multiplier since 1985?

b. What was the highest M1 money multiplier? When did this occur?

c. What is the current M1 money multiplier?

d. If banks have excess reserves to support lending, but firms and households do not wish to borrow, what affect will this have on the money multiplier?