Homework 10: Money Banking, Monetary Policy, And Bank Regula

Homework 10money Banking Monetary Policy And Bank Regulationanswer

Homework 10 Money, Banking, Monetary Policy, and Bank Regulation Answer the following based on chapters 14 and 15 of OpenStax. Ensure that any formulas used are clearly shown by either using a formula in Excel or writing the formula out—as you would for a math class. Question Point Value Total 100 Question 2 Answer the following questions about money. 1. Explain the basic functions of money. 1. Compare and contrast the types of money. 1. What is the difference between M1 and M2? Why aren’t M1 and M2 just combined? Question 3 Answer the following questions about the Federal Reserve. 1. What are the 3 functions of a central bank? 1. Describe the structure of the Fed. How is the Fed organized geographically? What is the process of appointing people to the Fed? 1. What powers does the Fed have? What do each of these powers do? Question 4 Answer the following questions. a) The total amount of U.S. currency in circulation divided by the U.S. population comes out to about $3,500 per person. That is more than most of us carry. Where is all the cash? b) Explain the positive (benefits) and negative (costs) aspects of a requirement that banks hold 100% of their deposits as reserves? Would this be feasible in the U.S.? c) Explain what would happen if banks were notified they had to increase their required reserves by one percentage point from, say, 9% to 10% of deposits. What would their options be to come up with the cash? Question 5 Suppose the Fed conducts an open market purchase by buying $10 million in Treasury bonds from Acme Bank. Sketch out the balance sheet changes that will occur as Acme converts the bond sale proceeds to new loans. The initial Acme bank balance sheet contains the following information: Assets – reserves 30, bonds 50, and loans 50; Liabilities – deposits 300 and equity 30. Question 6 Suppose the Fed conducts an open market sale by selling $10 million in Treasury bonds to Acme Bank. Sketch out the balance sheet changes that will occur as Acme restores its required reserves (10% of deposits) by reducing its loans. The initial balance sheet for Acme Bank contains the following information: Assets – reserves 30, bonds 50, and loans 250; Liabilities – deposits 300 and equity 30. Question 7 Answer the following questions. a) All other things being equal, by how much will nominal GDP expand if the central bank increases the money supply by $100 billion, and the velocity of money is 3? b) Suppose now that economists expect the velocity of money to increase by 50% as a result of the monetary stimulus. What will be the total increase in nominal GDP? c) If GDP is 1,500 and the money supply is 400, what is velocity? d) If GDP now rises to 1,600, but the money supply does not change, how has velocity changed? e) If GDP now falls back to 1,500 and the money supply falls to 350, what is velocity? Question 8: Correlation and Regression Worksheet Name: Neatly respond to each prompt. Show all work for full credit. Round to four decimal places. 1. For one month, 500 elementary students kept a daily record of the hours they spent watching television. The average number of hours per week spent watching television was 28. The researchers conducting the study also obtained report cards for each of the students. They found that the students who did well in school tended to spend less time watching television than those students who did poorly. Listed are several possible statements concerning the results of this research. Select each statement that you agree with based on this study. a. The sample of 500 is too small to permit drawing conclusions about elementary students in general. b. If a student decreased the amount of time spent watching television, his or her performance in school would improve. c. Even though students who did well watched less television, this doesn't necessarily mean that watching television hurts school performance. d. I don't agree with any of these statements. 2. Which of the following correlation values represents a perfect linear relationship between two quantitative variables? Select all that apply. a. 0 b. .9 c. -1 d. 1 e. .. If females of a certain species of lizard always mate with males that are .75 years younger than they are, what would the correlation between the ages of these male and female lizards be? 4. The correlation between two scores on tests was found to be exactly 1. Which of the following would not be true, regarding the corresponding scatterplot? a. Every point would lie along a perfect straight line, with no deviations at all. b. The slope of the best fitting line would be 1. c. The best fitting line would have an uphill (positive slope). d. All of the above are true. 5. Suppose the correlation between two variables, math achievement and math attitude was found to be .78. What does this tell us about the correlation between math attitude and math achievement? a. Nothing; not enough information given. b. The correlation is -.78. c. The correlation is 1-.78 = .22. d. The correlation is still .78. 6. We find that the correlation between educational level attained and yearly income is +0.72. This finding means that a. income is one result of higher educational level. b. lower income is associated with higher educational level. c. people with lower educational levels tend to have lower incomes. d. people with higher educational levels tend to have lower incomes. 7. Which of the following values is most likely to represent the correlation coefficient for the data shown in this scatterplot? a. r = -0.67 b. r = -0.10 c. r = 0.71 d. r = 0.93 e. r = 0.96 f. r = 1. . Suppose that a researcher found that undergraduate students who engage in a moderate amount of exercise are healthier that those who engage in either little exercise or in lots of exercise. This finding suggests what type of relationship between amount of exercise and degree of health? Select the correct answer. a. a negative linear relationship b. a positive linear relationship c. a strong linear relationship d. no linear relationship 8. Many studies have shown that high school students who study a foreign language tend to score higher on the Verbal portion of the Scholastic Aptitude Examination than high school students who do not study a foreign language. Can one reasonably conclude from this observation that studying the foreign language causes students to improve their verbal skills? Explain. 9. The number of people living on American farms has declined steadily during this century. For the farm population (millions of persons) from 1935 to 1980, the regression equation for estimating population from year is y = 1167 - .587 x. a. Use the regression equation to estimate the number of people living on farms in 1950. b. Use the regression line to estimate the number of people living on farms in 2013. Explain why it is not reasonable to use the regression equation to make this prediction (why did you get nonsense for your prediction?).

Paper For Above instruction

The comprehensive understanding of monetary policy, banking operations, and bank regulation involves grasping foundational concepts related to money functions, the structure and role of the Federal Reserve, and the direct and indirect effects of monetary policies on the economy. This paper explores these core areas, providing detailed insights supported by theoretical frameworks and empirical evidence from OpenStax chapters 14 and 15.

The functions of money are fundamental to economic stability and efficiency. Money serves three primary functions: a medium of exchange, a store of value, and a unit of account. As a medium of exchange, money facilitates transactions by eliminating the double coincidence of wants characteristic of barter systems (Mankiw, 2021). It provides liquidity, making it easier and quicker to buy and sell goods and services. As a store of value, money maintains its worth over time, allowing individuals and businesses to save and plan for future needs (Cecchetti & Schoenholtz, 2020). Lastly, as a unit of account, money provides a standard measure for pricing goods and services, enabling consistent economic calculations.

Different types of money include commodity money, representative money, and fiat money. Commodity money is backed by a physical commodity, such as gold or silver, which has intrinsic value. Representative money is backed by a promise to exchange it for a commodity, such as gold certificates used historically (Rogoff, 2019). Fiat money, which is the most prevalent today, has value primarily because the government declares it legal tender, with no intrinsic backing (Taylor, 2020). The distinction between M1 and M2 lies in their scope: M1 includes the most liquid forms of money—cash, demand deposits, and other checkable deposits—while M2 encompasses all of M1 plus less liquid forms like savings accounts, small time deposits, and retail money market funds (Federal Reserve, 2023). These measures are not combined because they serve different monetary functions and provide different insights into the money supply's liquidity and potential for impacting economic activity.

The Federal Reserve functions as the central bank of the United States and performs three core roles: conducting monetary policy, supervising and regulating banks, and maintaining financial stability (Board of Governors, 2020). Structurally, the Fed comprises a Board of Governors in Washington, D.C., and twelve regional Federal Reserve Banks across major cities in the U.S. Its organizational structure is geographically distributed to facilitate regional economic insights and policy implementation. The appointment process involves the President nominating Governors, who are confirmed by the Senate. The regional Fed Banks have boards of directors, some appointed and some elected, who oversee regional banking affairs. The Fed’s powers include setting reserve requirements, conducting open market operations, and influencing interest rates through the discount rate. These powers influence monetary aggregates, credit availability, and ultimately, inflation and unemployment.

Regarding currency in circulation, approximately $3,500 per person in the U.S. highlights the extensive use of cash beyond daily transactions, much of which remains in reserve or stored as savings, and in financial institutions (Federal Reserve, 2023). The reserve requirement system ensures bank liquidity and stability but comes with costs—such as limiting lending capacity and economic growth if reserves are too high. A 100% reserve requirement guarantees that all deposits are backed by reserves but is economically impractical in the U.S., as it would severely restrict lending and credit creation, which are vital for economic activity (Mankiw, 2021). If banks were required to increase reserves from 9% to 10%, they would need to hold additional reserves and reduce loans to meet the new reserve ratio, shrinking the money supply and potentially constraining economic growth.

When the Fed purchases Treasury bonds from a bank like Acme, the bank's reserves increase by the amount of the purchase; it gains assets in reserves and reduces bonds correspondingly. As Acme converts these proceeds into new loans, its balance sheet reflects an increase in loans and reserves, supporting economic activity. Conversely, a sale of bonds by the Fed reduces bank reserves; to maintain required reserves, Acme Bank will decrease its loans, shrinking the money supply. The process underscores how open market operations influence liquidity and credit creation in the banking system (Mishkin, 2019).

Changing the money supply impacts nominal GDP via the quantity theory of money: \(MV = PY\), where \(M\) is money supply, \(V\) is velocity, \(P\) is price level, and \(Y\) is real output. An increase of $100 billion in the money supply, with velocity at 3, can expand nominal GDP by \( \Delta GDP = \Delta M \times V \). Specifically, \(100 \times 3 = 300\) billion, meaning nominal GDP can rise by approximately $300 billion if velocity remains constant (Mankiw, 2021). If economists expect velocity to increase by 50%, the total effect on GDP would be amplified, calculated as \( \Delta GDP = \Delta M \times V_{new} \), where \(V_{new} = 1.5 \times V\).

The velocity of money, a measure of how often money turns over in the economy, can be computed as \(V = \frac{GDP}{M}\). For instance, if GDP is 1,500 and the money supply is 400, then \(V = \frac{1500}{400} = 3.75\). If GDP increases to 1,600 with unchanged money supply, then \(V = \frac{1600}{400} = 4.0\), indicating an increase in the velocity. Conversely, if GDP returns to 1,500 and money supply falls to 350, then \(V = \frac{1500}{350} \approx 4.29\), showing a higher velocity due to a shrinking money supply relative to GDP.

Correlation and regression analyses help identify relationships between variables. Perfect positive and negative correlations are represented by coefficients of 1 and -1, respectively. A correlation of 1 implies that all data points lie precisely on a positively sloped line, indicating a perfect linear relationship (Ott & Longnecker, 2015). Similarly, a correlation of -1 indicates a perfect linear negative relationship. A correlation of 0 signifies no linear relationship. For example, if female lizard ages are always exactly 0.75 years older than males, the correlation between their ages would be close to 1, assuming consistent age differences. A correlation of 1 indicates a perfect positive linear relationship, while a correlation near -0.67 indicates a moderate negative relationship (Lee, 2018).

Empirical data suggest that higher educational attainment correlates positively with income, with a correlation coefficient of +0.72. This indicates that higher education levels generally associate with higher income, though causation cannot be definitively inferred without further analysis (Bowen & Bok, 2019). Regarding scatterplots and correlation coefficients, a correlation of 0.71 could represent a moderate-to-strong positive relationship, while 0.96 would suggest a very strong positive correlation (De Veaux et al., 2019).

Studying a foreign language and higher SAT verbal scores are correlated, but this does not establish causation. It could be that students with certain cognitive skills are more likely to pursue language studies and perform well on verbal tests. Therefore, the causality cannot be ascertained purely from correlation, emphasizing the need for controlled experiments or longitudinal studies (Tabachnick & Fidell, 2013).

Regression analysis forecasting farm populations used the equation \( y = 1167 - 0.587x \). In 1950, substituting \(x=15\) (assuming \(x\) is years since a base year) yields an estimate, but projecting into 2013 would produce nonsensical values due to the regression's limited range and the changing economic and social factors affecting farms, illustrating the model's limitations for long-term forecasts (Montgomery et al., 2012).

In conclusion, understanding monetary policy and banking regulation requires integrating theoretical concepts with empirical data and statistical tools. The functions and types of money, roles of the Federal Reserve, and the effects of open market operations on the banking system form the backbone of macroeconomic stability and growth. Correlation and regression analyses further deepen insights into economic relationships, although careful interpretation is always necessary due to the distinction between correlation and causation, as well as model limitations. A comprehensive grasp of these concepts is essential for effective policy-making, economic analysis, and financial decision-making.

References

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