1. Suppose the Fed conducts an open market purchase by buying $10 million in Treasury bonds from Acme Bank. Sketch out the balance sheet changes that will occur as Acme converts the bond sale proceeds to new loans. The initial Acme bank balance sheet contains the following information: Assets – reserves 30, bonds 50, and loans 50; Liabilities – deposits 100 and equity 30.
2. If GDP is 1500 and the money supply is 400, what is velocity? If GDP now rises to 1600, but the money supply does not change, how has velocity changed? If GDP now falls back to 1500 and the money supply falls to 350, what is velocity?