Macroeconomics

David Colander

Chapter 13 The Financial Sector and the Economy - all with Video Answers

Educators

Chapter Questions

Problem 1

If financial institutions don't produce any tangible real assets, why are they considered a vital part of the U.S. economy? LO1

Tommy Nguyen

Numerade Educator

00:26

Problem 2

What are loanable funds? $\mathrm{LO} 2$

Erwin Antoni

Numerade Educator

Problem 3

In what market are long-term interest rates determined? $\mathrm{LO} 2$

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Problem 4

In what market are short-term interest rates determined? LO2

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01:10

Problem 5

Will there be too much or too little investment in the economy if the interest rate is higher than the rate that would equilibrate the supply and demand for loanable funds? LO2

Tristan Wille

Numerade Educator

02:01

Explain the effect of the following events on the interest rate in the loanable funds market. Demonstrate your answer graphically.
a. Tax revenue is lower than expected and people expect cities to default on municipal bonds. They sell their bonds and hold cash instead.
b. A significant number of people begin to use online banking services, allowing them to lower the average balance on their checking account.
c. Economists begin to expect economic growth to pick up. In response, firms increase the amount they spend on capital goods. LO2

Doris Bennett

Numerade Educator

01:43

Problem 7

What are the three functions of money? LO3

Rashmi Sinha

Numerade Educator

00:56

Problem 8

If dollar bills (Federal Reserve notes) are backed by nothing but promises and are in real terms worthless, why do people accept them? LO3

Xiaomin Bian

Numerade Educator

Problem 9

For each of the following, state whether it is considered money in the United States. Explain why or why not.
a. A check you write against deposits you have at Bank USA.
b. Brazilian reals.
c. The available credit you have on your MasterCard.
d. Reserves held by banks at the Federal Reserve Bank.
e. Federal Reserve notes in your wallet.
f. Gold bullion.
g. Grocery store coupons. LO3

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01:26

Problem 10

What function is money serving when people compare the price of chicken to the price of beef? LO4

Kaylee Mcclellan

Numerade Educator

01:30

Problem 11

How does inflation affect money's function as a store of wealth? LO4

Tristan Wille

Numerade Educator

01:22

Problem 12

State whether the following is an example of the transactions, precautionary, or speculative motive for holding money:
a. I like to have the flexibility of buying a few things for myself, such as a latte or a snack, every day, so I generally carry $$\$ 10$$ in my pocket.
b. You never know when your car will break down, so I always keep $$\$ 50$$ in my pocket.
c. When the stock market is falling, money managers generally hold more in cash than when the stock market is rising.
d. Any houschold has bills that are due every month. LO4

Doris Bennett

Numerade Educator

01:00

Problem 13

What are two components of $\mathrm{M}_2$ that are not components of $\mathrm{M}_1$ ? LO5

Christopher Stanley

Numerade Educator

02:45

Problem 14

Categorize the following as components of $M_1, M_2$, both, or neither.
a. State and local government bonds.
b. Checking accounts.
c. Money market mutual funds.
d. Currency.
c. Stocks.
f. Corporate bonds.
g. Traveler's checks. LO5

Pragya Ahuja

Numerade Educator

01:13

Problem 15

State the immediate effect of each of the following actions on $\mathrm{M}_1$ and $\mathrm{M}_2$ :
a. Barry writes his plumber a check for $$\$ 200$$. The plumber takes the check to the bank, keeps $$\$ 50$$ in cash, and deposits the remainder in his savings account.
b. Maureen deposits the $$\$ 1,000$$ from her $C D$ in a money market mutual fund.
c. Sylvia withdraws $$\$ 50$$ in cash from her savings account.
d. Paulo cashes a $$\$ 100$$ traveler's check that was issued in his Ohio bank at a New York bank. LO5

Xiaomin Bian

Numerade Educator

01:47

Problem 16

Why was character George Bailey in the film It's a Wonderful Life right when he stated on the day of a bank run that depositors could not withdraw all their money from the bank? LO6

Catt Huth

Numerade Educator

03:01

Problem 17

U.S. paper currency is made with several features that are difficult to counterfeit including a security thread, color-shifting ink, microprinting, a portrait, a watermark, and a fine-line printing pattern. As duplication technology, however, continually improves and more and more counterfeits are circulated, what will happen to the following?
a. The value of money circulated.
b. The volume of cashless transactions.
c. The amount of money the U.S. Treasury spends to introduce additional security measures. LO6

Kanishk Mishra

Numerade Educator

01:09

Problem 18

Write the equations for the simple money multiplier and the money multiplier. Which multiplier is most likely to be larger? LO7

Kaylee Mcclellan

Numerade Educator

Problem 19

True or false? Policy makers in practice use the money multiplier to determine the amount of reserves needed to achieve the desired money supply. Explain. LO7

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00:46

Problem 20

If the U.S. government were to raise the reserve requirement to 100 percent, what would likely happen to the interest rate banks pay on deposits? Why? LO7

Kaylee Mcclellan

Numerade Educator

01:35

Problem 21

While Jon is walking to school one morning, a helicopter flying overhead drops a $$\$ 100$$ bill. Not knowing how to return it, Jon keeps the money and deposits it in his bank. (No one in this economy holds currency.) If the bank keeps 5 percent of its money in reserves:
a. How much money can the bank initially lend out?
b. After this initial transaction, by how much is the money in the economy changed?
c. What's the money multiplier?
d. How much money will eventually be created by the banking system from Jon's $$\$100$$? LO6, LO7

Majid Borumand

Numerade Educator

02:22

Problem 22

Calculate the money multipliers below:
a. Assuming individuals hold no currency, calculate the simple money multiplier for each of the following: $5 \%, 10 \%, 20 \%, 25 \%, 50 \%, 75 \%, 100 \%$.
b. Assuming the currency to deposit ratio is 20 percent, recalculate the money multipliers in $a$. LO7

Kaylee Mcclellan

Numerade Educator

01:35

Problem 23

If people expect interest rates to rise in the future, how will they change the quantity of money they demand? Explain your answer. LO8

Tristan Wille

Numerade Educator

Problem 24

Do interest rates and prices of bonds vary inversely or directly with one another? Explain your answer. LO8

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04:00

Problem 25

Why is the demand for money downward-sloping? LO8

Noor Almesad

Numerade Educator

00:51

Problem 26

If the interest rate equilibrates the loanable funds market, but is too high to equilibrate the money market, what will happen to the price of financial assets? LO8

Nayeli Selkis

Numerade Educator

05:14

Problem 27

Explain the effect of the following events on the interest rate in the money market. Demonstrate your answer graphically.
a. The supply of money increases.
b. A significant number of people begin to use credit cards for daily transactions, reducing the amount of money they hold.
c. Bond traders expect bond prices to rise, and therefore reduce their cash holdings. LO8

Alex Loukas

Numerade Educator

Problem 1

Problem 2

Problem 3

Problem 4

Problem 5

Problem 6

Problem 7

Problem 8

Problem 9

Problem 10

Problem 11

Problem 12

Problem 13

Problem 14

Problem 15

Problem 16

Problem 17

Problem 18

Problem 19

Problem 20

Problem 21

Problem 22

Problem 23

Problem 24

Problem 25

Problem 26

Problem 27