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Problem Set 4

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Problem Set 4
Complete all questions listed below. Clearly label your answers.

1. What determines whether a financial asset is included in the M1 money supply? Why are interest-earning checkable deposits included in M1, whereas interest-earning savings accounts and Treasury bills are not? A financial assest is included in the M1 money supply when it can be quickly converted into the physical form of money, such as dollars and coins. Interested-earning checkable deposits are included because it can be quickly accessible without limitations, such as a checking account. Interest earning savings accounts and Treasury bills are short term investments and may have a time limit. 2. Why are banks able to maintain reserves that are only a fraction of the demand and savings deposits of their customers? Is your money safe in a bank? Why or why not? Savings cannot always be withdrawn and are more stable than checking accounts, as a result banks need to maintain reserves against their checking accounts (Gwartney, et al. 2013). Yes, money is safe in banks because the Federal Deposit Insurance Corporation (FDIC) was established in 1934 as a result of the 1922 to 1933 bank runs. This insurance insures me up to $250,000 per account if the bank fails.

3. What is the Federal Funds Interest rate? if the Fed wants to use open market operations to lower the federal funds rate, what action should it take? Federal Funds Interest rate is the interest rate at which the borrowing bank pays back to the lending bank and the weighted average of this rate is across all such transactions. The actions that the fed should take would be to sell securities and collect from those accounts.

4. Suppose that the reserve requirement is 10 percent and the balance sheet of the People's National Bank looks like the accompanying example.

a. What are the required reserves of

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