228 Chapter 13 Answers to End-of-Chapter Problems and Applications 2. As the Chinese government was being defeated, Chinese paper currency was ceasing to be fiat money, but, at least in Japan, had become a commodity money. 4. There is no effect on M1 because both currency and checking account balances are included in that measure of the money supply. Because M1 is not affected, neither is M2. 6. Deposits. Having more deposits allows these banks to make loans and other investments on which they are able to make profits. 8. There is no impact. The $100 was part of M1 when it was in your checking account and is still part of M1 when you hold it as currency. 10. Yes. The statement is correct. When bank reserves increases, they increase their loans, which creates new checking account deposits, thereby expanding the money supply. 12. a. Assets Liabilities Reserves +$2,000 Deposits +$2,000Bank of America Money, Banks, and the Federal Reserve System 229 b. c. Assets Liabilities Reserves +$2,000Deposits +$2,000 Bank of America Loans +$1,600Deposits +$1,600 Assets Liabilities Reserves +$400 Deposits +$2,000 Bank of AmericaLoans +$1,600Assets Liabilities Reserves +$1,600Deposits +$1,600 Citibank Bank 230 Chapter 13 d. Change in checking account deposits = $2,000 x 20. 01= $2,000 x 5 = $10,000 Because checking account deposits are part of the money supply, it is tempting to say that the money supply has also increased by $10,000. But remember that your $2,000 in currency was counted as part of the money supply while you had it, but is not included when it is sitting in a bank vault. Therefore, Change in the money supply = Increase in checking account deposits – Decline in currency in circulation = $10,000 – $2,000 = $8,000. 14. a. b. $10 million c. Change in checking account deposits = $10 million x 10. 01= $100 million. 16. a. Price deflation occurs when the price level declines from one year to the next. b. Ordinarily, as the quantity theory of money indicates, assuming velocity does not decline, rapid increases in the money supply lead to inflation. c. If consumers believe that prices are falling, they may postpone purchases because they expect prices to be lower in the future. This decline in consumption may push the economy into recession. 18. Banks do not print money, but they create money, specifically checking account balances, when making loans from excess reserves. By creating loans, banks create checking account balances. 20. The large quantity of Confederate dollars would have generated high inflation, which would have decreased the value of the Confederate currency. With the war drawing to an end, Southerners would Assets Liabilities Reserves +$10 million Discount Loan +$10 million FNB Money, Banks, and the Federal Reserve System 231 have been less and less willing to accept Confederate dollars. They could have made barter exchanges, or used dollars issued by the federal government of the United States. Chapter 14 Answers to End-of-Chapter Problems and Applications 2. To speed the recovery from the 2001 recession, the Federal Reserve pursued an expansionary monetary policy by lowering the target for the federal funds rate. The lower interest rates sustained and boosted the housing market even with the economy in recession. 4. a. Its original level must have been 1.75% + 4.75% = 6.5% b. As shown in Figure 14-4, an increase in the money supply will reduce interest rates. 6. The higher the interest rate, the more willing banks will be to make loans, everything else equal. The more loans banks make, the more money that is created. Therefore, there is good reason to think of the money supply curve as upward sloping. With an upward sloping money supply curve, an increase in the demand for money will cause both the equilibrium interest rate and the equilibrium level of M1 to increase. 232 Chapter 13 8. The author of the editorial confused the federal funds rate with the discount rate. The discount rate is the interest rate at which the Federal Reserve lends money to commercial banks. 10. Apparently banks in Japan were not lending out the new reserves being created by the Bank of Japan’s expansionary monetary policy. For an expansionary monetary policy to be successful, banks have to lend out the reserves created by the central bank. Banks in Japan were having difficulty finding firms optimistic enough about the future to be willing to borrow in order to purchase new machinery, equipment, and buildings. 12. If the main economic problem is inflation, a central bank will keep interest rates high and the rate of growth of the money supply low. If the main economic problem is slow growth and unemployment, a central bank will keep interest rates low and the rate of growth of the m。