Gordon Holmes Ch 14 11/27/12
Problems 1.4, 4.1-4.4, 5.1, 5.3, 5.4
1.4 The reason why businesses accept currency even though its printed on less worthy paper is because the dollar bill is actually a Federal Reserve note and that the Federal Reserve is not required to give gold or silver to for dollar bills. Federal Reserve currency is legal tender in the US, which means that the federal government requires that it be accepted in payment of debts and requires hat cash or checks denominated in dollar bills be use dint he payment of taxes.
4.1 The reason Congress set up a Federal Reserve System in 1913 is because those who deposited money into their accounts weren’t able to get their money back due to the fact that banks loan less than 100 percent of deposits and then loans the rest of the money to someone else. They set this up in order for the nation to have a safer, more flexible, and more stable monetary and financial system
4.2 In order for the Feds to control the money supply, the Feds use these policy tools to control the money supply (1) open the market operations (2) discount policy and (3) reserve requirements. The most important tool is checking account deposits.
4.3 The reason why an open market purchase of Treasury securities by the Federal Reserve increases bank reserves is because when the sellers of the treasury deposit the funds in their bank, the reserves of the banks rise. The reason why an open market sale of treasury securities by the Federal Reserve decreases bank reserves is because the FOMC directs the trading desk to sell treasury securities, causing the reserves of the bank to fall.
4.4 The shadow banking system is non financial institutions that borrow money in the short term and take that money to invest in long-term assets. They are more vulnerable because (1) the government agencies that regulated the commercial banking system did not regulate these firms and (2) these firms more highly leveraged than were commercials banks.
5.1 Quantity theory of money is a theory about the connection between money and prices that assumes that the velocity of money is constant. This theory leads to the following predictions (1) if the money supply grows at a faster rate than real GDP, there will be inflation (2) if the money supply grows at a slower rate than real GDP, there will be deflation and (3) if the money supply grows at the same rate as real GDP, the price level will be stable, and there will be neither inflation nor deflation.
5.3 Hyperinflation is very high rates of inflation which is caused by central banks increasing the money supply at a rate far in excess of the growth rate of real GDP. Governments sometimes allow it because governments want to spend more than they are able to raise through taxes. The US has the ability to bridge gaps between spending and taxes by borrowing through selling bonds to the public.
5.4 If the money supply is growing at a rate of 6 percent per year, real GDP is growing at a rate of 3 percent per year and velocity is constant, the inflation rate will be at 3 percent. If the velocity is increased by 1 percent per year instead of remaining constant, the inflation rate will be 4 percent.
5.7 The amount of confederate dollars would affect the confederacy currency in a way where the confederates would print money whenever they feel it was necessary. There were probably times where the confederate printed money for small reasons. With the war coming to an end, citizens of the confederates would not be as willing to spend and use confederate dollars. The confederate citizens could have made exchanges with natural goods and other goods that people kept in their houses.