Chapter 14: Q3. (page 541)
Use your answer from Question 2 to explain why cash never “sells” at a discount.
The cash can never sell at a discount since it can buy anything and everything and is not constrained or limited to a single store only.
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Although most bank accounts pay some interest, depositors can get a higher interest rate by buying a certificate of deposit, or CD. The difference between a CD and a checking account is that the depositor pays a penalty for withdrawing the money before the CD comes due—a period of months or even years. Small CDs are counted in M2 but not in M1. Explain why they are not part of M1.
What are the similarities between the Panic of 1907, the S&L crisis, and the crisis of 2008?
A con artist has a great idea: he’ll open a bank without investing any capital and lend all the deposits at high-interest rates to real estate developers. If the real estate market booms, the loans will be repaid and he’ll make high profits. If the real estate market goes bust, the loans won’t be repaid and the bank will fail—but he will not lose any of his own wealth. How would modern bank regulation frustrate his scheme?
Explain why retailers prefer to reward loyal customers with gift cards instead of rebate checks.
Assume that total reserves are equal to \(200 and total checkable bank deposits are equal to \)1,000.Also, assume that the public does not hold any currency. Now suppose that the required reserve ratio falls from 20% to 10%. Trace out how this leads to an expansion in bank deposits.
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