Problem 1
What are the three basic functions of money? Describe how rapid inflation can undermine money's ability to perform each of the three functions.
Problem 2
Which two of the following financial institutions offer checkable deposits included within the \(M 1\) money supply: mutual fund companies; insurance companies; commercial banks; securities firms; thrift institutions? Which of the following items is not included in either \(M 1\) or \(M 2:\) currency held by the public; checkable deposits; money market mutual fund balances; small- denominated (less than \(\$ 100,000\) ) time deposits; currency held by banks; savings deposits?
Problem 4
Explain and evaluate the following statements: a. The invention of money is one of the great achievements of humankind, for without it the enrichment that comes from broadening trade would have been impossible. b. Money is whatever society says it is. c. In the United States, the debts of government and commercial banks are used as money. d. People often say they would like to have more money, but what they usually mean is that they would like to have more goods and services. e. When the price of everything goes up, it is not because everything is worth more but because the currency is worth less. f. Any central bank can create money; the trick is to create enough, but not too much, of it.
Problem 5
What "backs" the money supply in the United States? What determines the value (domestic purchasing power) of money? How does the purchasing power of money relate to the price level? Who in the United States is responsible for maintaining money's purchasing power?
Problem 6
How is the chairperson of the Federal Reserve System selected? Describe the relationship between the Board of Governors of the Federal Reserve System and the 12 Federal Reserve Banks. What is the purpose of the Federal Open Market Committee (FOMC)? What is its makeup?
Problem 7
The following are two hypothetical ways in which the Federal Reserve Board might be appointed. Would you favor either of these two methods over the present method? Why or why not? a. Upon taking office, the U.S. president appoints seven people to the Federal Reserve Board, including a chair. Each appointee must be confirmed by a majority vote of the Senate, and each serves the same 4-year term as the president. b. Congress selects seven members from its ranks (four from the House of Representatives and three from the Senate) to serve at congressional pleasure as the Board of Governors of the Federal Reserve System.
Problem 8
What is meant when economists say that the Federal Reserve Banks are central banks, quasi-public banks, and bankers" banks?
Problem 9
Why do economists nearly uniformly support an independent Fed rather than one beholden directly to either the president or Congress?
Problem 10
Identify three functions of the Federal Reserve of your choice, other than its main role of controlling the supply of money.
Problem 11
How does each of the following relate to the financial crisis of \(2007-2008:\) declines in real estate values, subprime mortgage loans, mortgage-backed securities, AIG.
