These questions along with questions in Homework 1 and 2 will help you prepare for the midterm.

1. Draw a balance sheet for the Federal Reserve. Explain how each item fits under liabilities and assets for the Federal Reserve and how that is different from commercial banks.

2. Explain how the FDIC works. What are the pros and cons of having an institution such as the FDIC?

3. Explain how the Fed uses open market operations to influence the money supply. Explain both an open market purchase and an open market sale.

4. What is the monetary base? Assume the Fed increases the monetary base by increasing reserves at Bank A by $200 million and the required reserve ratio is 5%. Show how the money supply would increase using balance sheets of 4 different banks.

5. Using the appropriate formula, calculate the total increase in money supply using the information in question 4 above.

6. What is the Fed funds rate? How is it linked to open market operations? Explain what policy the Fed would undertake in order to lower the Fed funds rate.

7. What is capital adequacy regulation? What was the intended purpose of the Basel Accord? Using the risk-weight categories, explain what unintended consequences came about leading up to the Financial crisis of 2008.

8. Checking accounts and deposits are as good as/substitutable for actual cash or currency. What role does this fact play in the money creation process that is inherent to fractional reserve banking?

9. Certain economists argue that fractional reserve banking is fraudulent or unethical. Make an argument in support of this statement. Now make an argument against this statement.

10. Explain the difference between commodity money and fiat money. Provide two examples of each.