7

Chapter 9
#1
What are the three basic functions of money? Money is a medium of exchange that is usuable for buying and selling goods and services, as a unit of account (monetary units=dollars), and a store of value that allows people to transfer purchasing power from the present to the future.
Describe how rapid inflation can undermine money’s ability to perform each of the three functions. Rapid inflation greatly reduces the use of money so money loses its value. Since people only accept money in exchange for services and goods and money will keep its value until it is spent so therefore people revert to barter during inflation.

#6
What is meant when economists say that the Federal Reserve Banks are central banks, quasi-public banks and banker’s banks? They are central banks whose policies are coordinated by the Board of Governors. They are quasi-public banks because they are privately owned but have public control. They are banker’s banks because they perform the same functions for thrifts and banks as are performed by the banks to the public.
What are the seven basic functions of the Federal Reserve System? The seven basic functions of the Federal Reserve System are as follows:
The Fed issues Federal Reserve Notes, the paper currency used in the US monetary system, sets reserve requirements and holds the mandated reserves that are not held as vault cash, lends money to banks and thrifts, provides for check collection, acts as fiscal agent for the Federal government, supervises the operation of all US banks, and has responsibility for regulating the supply of money.

#7
How do each of the following relate to the financial crisis of 2007-2008?
(a)Declines in real estate values: Home prices rapidly increased because of subprime mortgage loans issued to risky borrowers.
(b)Subprime Mortgage Loans: Banks issued loans to risky borrowers who were more likely to default on their loans. This resulted in a rapid increase in home prices that was unsustainable.
(c)Mortgage backed securities AIG: This followed the Subprime Mortgage loans and bundled riskier mortgages together and sold them to investors. This reduced the risk exposure that banks faced after issuing the loans and caused investors to default on their loans to banks that originally offered the mortgage backed securities. There was a major write off of bad loans.

#8
What is TARP and how was it funded? TARP is a program that allocated $700 billion to the US Treasury to make emergency loans to critical financial and other US firms. Of that $700 billion, $411 billion was distributed before lending from TARP ended in October 2010.
How do government loans relate to the concept of moral hazard? TARP saved several financial institutions whose bankruptcy would have caused a tsunami of secondary effects that probably would have brought down other financial firms and froze credit throughout the economy. This in itself relates to moral hazard since moral hazard is the tendency for financial investors and financial service firms to take on greater risks because they assume they are at least partially insured against losses.