M2 = M1 + savings accounts + money market accounts + other near moniesa. M1 = 800 + 1000 + 100 + 200 = $2100 billion. M2 = 2100 (M1) + 300 + 100 + 200 = $2700 billion.Bank reserves are deposits that a bank has at the Federal Reserve Bank plus its cash on hand.Excess reserves are the difference between a bank's actual reserves and its required reserves.The Fed decreased the discount rate.Commercial banks started to lend out more of their excess reserves.The Fed bought securities from the public.The Fed lowered the required reserve ratio.The Fed chairman announces that interest rates are going to be cut.73. Explain what a vertical money supply curve suggests about the relationship between the money supply and the interest rate.74. What are the three tools of the Federal Reserve? Also, explain how each can be used to increase the money supply.Chapter 10 (23): The Money and the Federal Reserve 10(23) The Money Supply and the Federal Reserve An Overview of Money1. List and explain the three characteristics of money.The three characteristics of money are that it serves as a medium of exchange, a store of value and a unit of account. As a medium of exchange it eliminates the double coincidence of wants inherent in a barter system. The store of value allows purchasing power to be transferred from one time period to the next. Finally, as a unit of account it allows for a consistent way of quoting prices.Difficulty: E Type: D2. Compare and contrast fiat money and commodity money.Fiat money includes items that are designated as money that are intrinsically worthless. Commodity money are things like gold or silver which have alternative uses other than money. They can be used in dental fillings or as jewelry.Difficulty: E Type: D3. Explain what currency debasement is.Currency debasement is the decrease in the value of money that occurs when its supply is increased rapidly.Difficulty: E Type: D181Test Item File 3: Principles of Macroeconomics4. Write out in equation form the four major components of M1.M1 = currency held outside banks + demand deposits + traveler's checks + other checkable depositsDifficulty: E Type: D5. If Bob makes a deposit of $1000 into his checking account at his bank, explain what happens to the value of M1.The value of M1 remains unchanged. All that happens is that there is less currency held by the public and more demand deposits of an equal amount. The net effect is awash.Difficulty: E Type: D6. Explain what happens to the value of M2 if the public makes $1 million worth of cash deposits in the banking system.The $1 million worth of cash deposits will simply increase the amount of demand deposits but will not alter the overall level of M1. Since M2 is the sum of M1 and near monies the level of M2 remains unchanged as well.Difficulty: E Type: D7. Write out in equation form the four components of M2.M2 = M1 + savings accounts + money market accounts + other near moniesDifficulty: E Type: D8. Explain what near monies are.Near monies are close substitutes for transactions money, such as savings accounts and money market accounts.Difficulty: E Type: D 182Chapter 10 (23): The Money and the Federal Reserve 9. Answer the questions below using the following information:All figures are in billions of dollars.Currency held outside banks $ 800Demand Deposits 1000Traveler's Checks 100Other checkable deposits 200Savings accounts 300Money market accounts 100Other near monies 200a. What is the value of M1?b. What is the value of M2?a. M1 = 800 + 1000 + 100 + 200 = $2100 billion. M2 = 2100 (M1) + 300 + 100 + 200 = $2700 billion.Difficulty: E Type: D10. Discuss the role of financial intermediaries in the economy.Financial intermediaries are banks and other institutions that act as a link between those who have money to lend and those who want to borrow money.Difficulty: E Type: D11. Explain the purpose of the Depository Institutions Deregulation and Monetary Control Act.It was enacted in 1980 by Congress to eliminate many of the previous restrictions onthe behavior of financial institutions. For example it allowed banks for the first time to pay depositors interest on their checking accounts. In addition, it permitted savings and loan associations to make loans for many more things besides home mortgages. In a nutshell, it eliminated many of the distinctions between banks, thrifts, insurance companies and brokerage houses.Difficulty: E Type: D12. Explain the difference between commodity monies, fiat money, and legal tender. Commodity monies are those tangible items that are used as monies that also have an intrinsic value in other forms of use. Examples include gold, precious stones, jewelry, cigarettes, and countless other items. Fiat or token money is intrinsically worth less than its face value and has full face value only because it is universally accepted as money. The dollar is intrinsically worthless and acquires value only because it is accepted in performing the functions of money. Legal tender represents money that a government declares to be accepted to perform the various functions 183Test Item File 3: Principles of Macroeconomicsof money. It is used to fulfill debt obligations. Difficulty:E Type: D13. What is transactions money (M1)? Identify the components of transactions money. Transactions money (M1) consists of money that can be directly used to facilitate exchange or the purchase of goods and services. Transactions money (M1) consists ofcurrency held outside banks, checking account monies, demand deposits, travelers checks, and other checkable deposits. Difficulty: E Type: D14. What are the assets of commercial banks and why are the assets? Among the assets of commercial banks are reserves and loans. Reserves are assets because they are cash in the commercial bank or deposits at the Federal Reserve. Loans are assets of the commercial bank because they are owed by the borrower to the commercial bank. Difficulty: E Type: C15. What are liabilities of commercial banks and why are they liabilities. Deposits of all types are liabilities of commercial banks. They are liabilities of commercial banks because the bank owes the amount of the deposit plus interest, if any is paid on the particular type of deposit, to the depositor. Difficulty: E Type: C16. Define a financial intermediary. A financial intermediary is a bank or other institution that serves as a link between lenders and borrowers. They typically accept savings deposits from consumers