【正文】 nstrates the role of the banking system in expanding the money supply.InstructionsThe two volunteers are bankers. Have each of them draw a balance sheet on the board. BankTwo AmerBankCorpAssets Liabilities Assets Liabilities 0 0 0 0The rest of the class is the public. They are all eager borrowers and depositors.The instructor is the Federal Reserve. The Federal Reserve sets the reserve requirement at 20% of deposits.Chapter 16/The Moary System???275169。 2022 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.The Federal Reserve also conducts openmarket operations. Use the $1,000 paper to buy a baseball cap from a student. (Explain that the Fed actually buys government bonds from the public because the market for used baseball caps is small.)The capless student now has $1,000 to spend with any other member of the class. This student receives $1,000 and puts it in the bank of his or her choice.The bank now has $1,000 in deposits (a liability) and $1,000 in cash (an asset). The bank needs to keep $200 in reserve (20%) but can loan the other $800. Have the banker tear off 20% of the bill and give the rest to another student.Revise the banks39。 balance sheets.Now the borrower spends the $800 and the recipient deposits it in a bank. This bank now has $800 in deposits and $800 in cash. Of that, $160 needs to be kept in reserve and $640 can be lent. Have the banker save 20% of the paper and give the rest to another eager borrower.Revise the banks39。 balance sheets.Continue this process for a few more iterations.At the end, ask everyone who has money in the bank to stand. The total deposits in the bank will far exceed the initial $1,000 that the Fed put into the economy.Show the final balance sheet for each bank.Points for DiscussionBanks are important to the process of money creation. The banking system, as a whole, literally expands the money supply. If the process is carried on far enough, you can derive the money multiplier.E. The Federal Funds Rate1. Definition of federal funds rate: the shortterm interest rate that banks charge one another for loans.2. When the federal funds rate rises or falls, other interest rates often move in the same direction.3. In recent years, the Fed has set a target for the federal funds rate.F. In the News: Bernanke on the Fed’s Toolbox1. During the financial crisis of 2022 and 2022, the Fed expanded reserves to help struggling banks.2. This is an article written by Fed chairman, Ben Bernanke, discussing the Fed’s options for reversing this policy once the economy recovers from this deep recession.276???Chapter 16/The Moary System169。 2022 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.SOLUTIONS TO TEXT PROBLEMS:Quick Quizzes1. The three functions of money are: (1) medium of exchange。 (2) unit of account。 and (3) store of value. Money is a medium of exchange because money is the item people use to purchase goods and services. Money is a unit of account because it is the yardstick people use to post prices and record debts. Money is a store of value because people use it to transfer purchasing power from the present to the future.2. The primary responsibilities of the Federal Reserve are to regulate banks, to ensure the health of the banking system, and to control the quantity of money that is made available in the economy. If the Fed wants to increase the supply of money, it usually does so by creating dollars and using them to purchase government bonds from the public in the nation’s bond markets.3. Banks create money when they hold a fraction of their deposits in reserve and lend out the remainder. If the Fed wanted to use all of its tools to decrease the money supply, it would: (1) sell government bonds from its portfolio in the open market to reduce the number of dollars in circulation。 (2) increase reserve requirements to reduce the money created by banks。 (3) increase the interest rate it pays on reserves to increase the reserves banks will choose to hold。 and (4) increase the discount rate to discourage banks from borrowing reserves from the Fed.Questions for Review1. Money is different from other assets in the economy because it is the most liquid asset available. Other assets vary widely in their liquidity.2. Commodity money is money with intrinsic value, like gold, which can be used for purposes other than as a medium of exchange. Fiat money is money without intrinsic value。 it has no value other than its use as a medium of exchange. Our economy uses fiat money.3. Demand deposits are balances in bank accounts that depositors can access on demand simply by writing a check or using a debit card. They should be included in the supply of money because they can be used as a medium of exchange.4. The Federal Open Market Committee (FOMC) is responsible for setting moary policy in the United States. The FOMC consists of the 7 members of the Federal Reserve Board of Governors and 5 of the 12 presidents of Federal Reserve Banks. Members of the Board of Governors are appointed by the president of the United States and confirmed by the . Senate. The presidents of the Federal Reserve Banks are chosen by each bank’s board of directors.5. If the Fed wants to increase the supply of money with openmarket operations, it purchases . government bonds from the public on the open market. The purchase increases the number of dollars in the hands of the public, thus raising the money supply.6. Banks do not hold 100% reserves because it is more profitable to use the reserves to make loans, which earn interest, instead of leaving the money as reserves. The amount of reserves Chapter 16/The Moary System???277169。 2022 Cen