Homework #2

Due 10/15 at the end of class

1. What is meant by the term "fractionally backed currency"? How does fractionally backed currency come about?

2. Briefly, how do nominal interest rates, ex-ante real interest rates, and ex-post real interest rates differ? Of the two real rates, which is the most important for understanding economic decisions?

3. How has the power structure of the Fed changed over time?

4. Discuss arguments for and against the independence of the Fed.

5. Does the Fed have better control over reserves or the monetary base? Explain.

6. Suppose the Fed sells $1,000 worth of securities to the public. Assuming that the reserve requirement is 25%, use t-accounts to show the resulting multiple deposit contraction (carry the t-accounts out through three steps). Use the multiplier formula to calculate the total fall in bank deposits. [This problem has been omitted from this assignment since we didn't get to this material. If you did the problem already, note that it will be on the next homework.]