Chapter 29

1. 
a. As we are considering the U.S economy, a U.S. penny can be determined as money regarding its
functions.
 As a medium of exchange: A U.S penny can be used to obtain goods and services
 As a unit of account: goods in stores may have their prices listed as cents or dollars.
 As a store of value: people can keep this penny and use its purchasing power in the future.

b. We cannot consider a Mexican peso as money if we are in the U.S economy, because it lacks money’s
functions as a medium of exchange (we need to exchange this peso into U.S dollars to purchase goods)
and also as a unit of account (pesos cannot be the yardstick used to post prices in shops).

c. A Picasso painting cannot be determined as money, as it does not have two functions of money: a
medium of exchange and a unit of account.

d. A plastic credit card is not money, but rather a means of deferring payment.

2. 
a. The Fed’s bonds buying in OMO may increase money supply, as new money is generated to the
public.

b. Reducing reserve requirements gives banks the opportunity to reserve less and loan more, thus
increasing the money supply.

c. As interest rate on reserves is increased, banks are likely to reserve more and loan less, therefore,
there may be a decrease in money supply.

d. Loans being repaid by Citibank to the Fed will decrease the money supply, as Citibank now has to
reserve using its own assets, thus loans lessen and so does money supply.

e. When people hold less cash, the money supply may decrease as it consists of currency and deposits.

f. More excess reserves being held leads to a fall in loans, which in turn may decrease money supply.

g. An increase in the target for the federal funds rate issued by the FOMC will eventually decrease the
money supply, as it is more expensive to borrow reserves from the Fed, banks will be reluctant to do so.
Loans will therefore decrease, so less money will be created.

3.
My uncle’s wealth does not change, as previously he has $100 in his account but also owe $100, now he
has no money in his checking account but he also is not in debt.

4.

c. BSB’s loans being decreased may lead to a shortage of reserves in other banks, so there may also be a
cut on other banks’ loans.

d. It may be hard for BSB to cut back on its loans right away, as it is not possible to force people to pay
their loans before deadline. Alternatively, it can halt making new loans and try to attract more deposits
to bring about more reserves, or take loans from another bank or from the Fed.
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12.