Money and Banking

J. Zachary Klingensmith

10.1 defining money by its functions

Review Activities

The original version of this chapter contained H5P content. You may want to remove or replace this element.

Practice Problems

Problem 10.1.1: For each of the following, determine whether money is being used as a medium of exchange, unit of account, standard of deferred payment, or store of value.

1.The price of a hotdog is $2 while the price of a hamburger is $4. We can see that a hamburger is twice as expensive as a hotdog.
Zheng saves $50 from each paycheck to save up the $600 he needs for a new laptop.
Sally uses $10 to purchase lunch.
As a dairy farmer, you use the money you earn from working to pay for goods and services instead of paying for the goods and services in milk.
The bank accepts US dollars as repayment for your loan because they know they will hold value and can use them to make more purchases.

Answers: Unit of account; Store of value (or standard of deferred payment okay too); Medium of exchange; Medium of exchange; Standard of deferred payment

https://youtu.be/aOCnlDJNtSI

External Resources

Khan Academy: Functions of Money

Khan Academy: Commodity Money versus Fiat Money

10.2 measuring money: currency, m1, and m2

Review Activities

The original version of this chapter contained H5P content. You may want to remove or replace this element.

Practice Problems

No practice problems for this section.

External Resources

Khan Academy: Money Supply: M0, M1, and M2

10.3 the role of banks

Review Activities

The original version of this chapter contained H5P content. You may want to remove or replace this element.

Practice Problems

Problem 10.3.1: Marquette Bank receives a $500,000 deposit. The reserve requirement is 10%. Further, the bank wants to loan out $300,000 and buy $50,000 worth of US Government Securities. Create a balance sheet for the bank showing assets on one side and liabilities and net worth on the other.

Answer: See video for solution.

https://youtu.be/SHnx9AVh67c

External Resources

No external resources for this section.

10.4 how banks create money

Review Activities

The original version of this chapter contained H5P content. You may want to remove or replace this element.

Practice Problems

Problem 10.4.1: Katarina deposits $1,000 into PNC Bank. The current reserve requirement is 25%.

Show the first three rounds of savings on balance sheets. I provided a template for the balance sheet for one bank below. You need three.
Calculate the total amount of deposits in the banking system after an infinite number of rounds of savings.

Assets		Liabilities + Net Worth
Loans		Deposits
Reserves
USGS		Net Worth

Answers: See video for balance sheets; $4,000.

https://youtu.be/FYM0L3T6AzU

Problem 10.4.2: Mohammad deposits $5,000 into the Erie Federal Credit Union. The current reserve requirement is 10%.

Show the first three rounds of savings on balance sheets. I provided a template for the balance sheet for one bank below. You need three.
Calculate the total amount of deposits in the banking system after an infinite number of rounds of savings.

Assets		Liabilities
Loans		Deposits
Reserves
USGS		Net Worth

Answers: See video for balance sheets; $50,000.

https://youtu.be/SzfjztZk_NM

Problem 10.4.3: Suppose that the Federal Reserve wants a $2,000 deposit to increase deposits by a total of $10,000. What reserve requirement should they set?

Answer: 20%

https://youtu.be/ojtAZuh53KU

Problem 10.4.4: Suppose that the Federal Reserve wants a $1,000 deposit to increase deposits by a total of $20,000. What reserve requirement should they set?

Answer: 5%

https://youtu.be/G8B94FL3Vc8