Assignment:
RESERVE REQUIREMENTS
1. The banking system can influence the economy in several ways and one of those ways can affect the money supply with policy changes that do not directly add/take away dollars in circulation - there is a trick to this! This point I would like everyone to understand is the reserve requirement. The reserve requirement is a percentage of an institution's deposits that it must have in actual deposits (vault cash) in order to satisfy potential demands for cash by depositors. The reserve requirement is also set by the Federal Reserve and is another monetary policy tool in its arsenal to affect the money supply.
For example, assume the current reserve requirement is 20% - meaning institutions must 'hold onto' $2 for every $10 in deposits - and I deposit $1,000 in a bank. The bank does not earn money on my deposit, so keeping my deposit in their 'vault' does no good. The bank must hold $200 and can only loan $800 of my deposit. If the Federal Reserve wants to increase the money supply without adding any actually money - they can do this by decreasing the reserve requirement to 10%. Now the bank can lend not only $9 out of every $10 in new deposits, but can lend out half of its current vault cash (the reserve requirement was cut in half, so the bank only has to maintain half of its vault cash). Just to emphasize, banks would rather lend the money it has in deposits than hold it in the vault.
Please review the link to determine the current reserve requirement and discuss your findings.
https://www.federalreserve.gov/monetarypolicy/reservereq.htm
TERM AUCTIONS
2. In the text, it describes the method of auctioning the banks' bids for money. The procedure to be where the sum of the bids with the lowest interest rates equals the total amount to be loaned. The text says that the interest rate on all the loans will be the one offered by the lowest bidder. However, it goes on to say that the interest rate paid by all is equal to the bid that exhausts the total amount of money auctioned.
It seems there are two different interest rates possible- the lowest out of the total bids and the interest rate of the 'last' bid. Which is correct and why? Explain.
ABSOLUTE VS. COMPARATIVE ADVANTAGE
3. As this is part of your Learning Team assignment for this week, I figured we should at least identify the difference between absolute advantage and comparative advantage.
Absolute advantage is the ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost at which any other entity produces that good or service.
Comparative advantage is the ability of a firm or individual to produce goods and/or services at a lower opportunity cost than other firms or individuals.
What are some specific examples of both absolute advantages and comparative advantages?
https://www.investopedia.com/terms/a/absoluteadvantage.asp
https://www.investopedia.com/terms/c/comparativeadvantage.asp?o=40186&l=dir&qsrc=999&qo=investopediaSiteSearch