hubbard_econ01_eoca_25-30

hubbard_econ01_eoca_25-30 - Chapter 25 Answers to...

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228 Chapter 25 Answers to End-of-Chapter Problems and Applications 2. As the Chinese government was being defeated, Chinese paper currency was ceasing to be fiat money, but, at least in Japan, had become a commodity money. 4. There is no effect on M1 because both currency and checking account balances are included in that measure of the money supply. Because M1 is not affected, neither is M2. 6. Deposits. Having more deposits allows these banks to make loans and other investments on which they are able to make profits. 8. There is no impact. The $100 was part of M1 when it was in your checking account and is still part of M1 when you hold it as currency. 10. Yes. The statement is correct. When bank reserves increases, they increase their loans, which creates new checking account deposits, thereby expanding the money supply. 12. a. Assets Liabilities Reserves +$2,000 Deposits +$2,000 Bank of America
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Money, Banks, and the Federal Reserve System 229 b. c. Assets Liabilities Reserves +$2,000 Deposits +$2,000 Bank of America Loans +$1,600 Deposits +$1,600 Assets Liabilities Reserves +$400 Deposits +$2,000 Bank of America Loans +$1,600 Assets Liabilities Reserves +$1,600 Deposits +$1,600 Citibank Bank
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230 Chapter 13 d. Change in checking account deposits = $2,000 x 20 . 0 1 = $2,000 x 5 = $10,000 Because checking account deposits are part of the money supply, it is tempting to say that the money supply has also increased by $10,000. But remember that your $2,000 in currency was counted as part of the money supply while you had it, but is not included when it is sitting in a bank vault. Therefore, Change in the money supply = Increase in checking account deposits – Decline in currency in circulation = $10,000 – $2,000 = $8,000. 14. a. b. $10 million c. Change in checking account deposits = $10 million x 10 . 0 1 = $100 million. 16. a. Price deflation occurs when the price level declines from one year to the next. b. Ordinarily, as the quantity theory of money indicates, assuming velocity does not decline, rapid increases in the money supply lead to inflation. c. If consumers believe that prices are falling, they may postpone purchases because they expect prices to be lower in the future. This decline in consumption may push the economy into recession. 18. Banks do not print money, but they create money, specifically checking account balances, when making loans from excess reserves. By creating loans, banks create checking account balances. 20. The large quantity of Confederate dollars would have generated high inflation, which would have decreased the value of the Confederate currency. With the war drawing to an end, Southerners would Assets Liabilities Reserves +$10 million Discount Loan +$10 million FNB
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Money, Banks, and the Federal Reserve System 231 have been less and less willing to accept Confederate dollars. They could have made barter exchanges, or used dollars issued by the federal government of the United States.
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hubbard_econ01_eoca_25-30 - Chapter 25 Answers to...

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