Use the Market for Reserves framework to analyze each of the following scenarios. Treat each scenario separately (i.e. draw a separate graph for each). Assume that the market is currently in equilibrium. Important: Make sure that your graphs clearly show changes in the equilibrium federal funds rate, changes in the equilibrium level of reserves, and any shifts in the demand or supply curves. Explain in one sentence what your graph is showing.
Commercial banks increase their demand for reserves.
The Fed decides to decrease the required reserves ratio.
Complete the questions below based on the following scenario: ABC Financial starts its first day of operations with $9 million in capital. A total of $130 million in checkable deposits is received. The bank makes a $25 million commercial loan and another $50 million in mortgages with the following terms: 200 standard, 30-year, fixed-rate mortgages with a nominal annual rate of 5.25%, each for $250,000. Assume that required reserves are 8%.
Illustrate the balance sheet for ABC Financial.
How well capitalized is this bank? Show your calculations to support your answer.
Calculate the risk-weighted assets and risk-weighted capital ratio after ABC’s first day.
Use the Taylor rule to calculate the target for the federal funds rate for October 2012, using the following information: equilibrium real federal funds rate of 2%, target inflation rate of 2%, current inflation rate of 1.2%, and an output gap of 5.9%. In your calculations, the inflation gap is negative if the current inflation rate is below the target inflation rate. How does the targeted federal funds rate calculated using the Taylor rule compare to the actual federal funds rate of 0% to 0.25% at the time? Briefly explain.