EXAM 3 Questions
Chapter 28:
12. 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. If the bank keeps
5 percent of its money in reserves: (LO28-2)
How much money can the bank initially lend out?
The bank can initially lend out $100 – (0.05 × 100) = $95.
After this initial transaction, by how much is the money in the economy changed?
There is now an additional ($100 + $95) = $195 in the economy.
What’s the money multiplier?
The multiplier is 1/0.05 = 20
How much money will eventually be created by the banking system from Jon’s $100?
John’s $100 will ultimately turn into $100 × 20 = $2,000 of money in the economy.
14. If financial institutions don’t produce any tangible real assets, why are they considered a
vital part of the U.S. economy?
Although financial institutions don't produce any tangible real assets, they are
nonetheless considered a vital part of the economy because of their central role in transferring
savings into investment and in making the real economy more efficient.
16. The financial sector channels saving into spending. (LO28-3)
a) What is the risk of the financial sector expanding the spending flow too much?
Expanding spending too quickly might create inflation
b) What kept this from happening in the United States in from 2000 to 2007?
Globalization kept inflation low in the period from 2000 to 2007 because foreign firms
could sell products at much lower prices than could domestic firms.
Chapter 29:
3. Is the Fed a private or a public agency?
It is neither completely private nor completely public. The Fed is a semi-autonomous
agency of the federal government. Although it is owned by member banks, its officials are
appointed by government. It is a creation of Congress, but has much more independence than
do most public agencies.
Chapter 28:
12. 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. If the bank keeps
5 percent of its money in reserves: (LO28-2)
How much money can the bank initially lend out?
The bank can initially lend out $100 – (0.05 × 100) = $95.
After this initial transaction, by how much is the money in the economy changed?
There is now an additional ($100 + $95) = $195 in the economy.
What’s the money multiplier?
The multiplier is 1/0.05 = 20
How much money will eventually be created by the banking system from Jon’s $100?
John’s $100 will ultimately turn into $100 × 20 = $2,000 of money in the economy.
14. If financial institutions don’t produce any tangible real assets, why are they considered a
vital part of the U.S. economy?
Although financial institutions don't produce any tangible real assets, they are
nonetheless considered a vital part of the economy because of their central role in transferring
savings into investment and in making the real economy more efficient.
16. The financial sector channels saving into spending. (LO28-3)
a) What is the risk of the financial sector expanding the spending flow too much?
Expanding spending too quickly might create inflation
b) What kept this from happening in the United States in from 2000 to 2007?
Globalization kept inflation low in the period from 2000 to 2007 because foreign firms
could sell products at much lower prices than could domestic firms.
Chapter 29:
3. Is the Fed a private or a public agency?
It is neither completely private nor completely public. The Fed is a semi-autonomous
agency of the federal government. Although it is owned by member banks, its officials are
appointed by government. It is a creation of Congress, but has much more independence than
do most public agencies.
