1. Consider it bank where total loans are equal to $800 million and required reserves are $40 million. and where the resei V( requirement is 10%.
(a.) Fill the bank's balance sheet, assuming that it does riot hold excess reserves.
| Assetss |
Liabilities |
| Loans |
Deposits |
| Required Reserves |
Net Worth |
(b) Write the formula for the money multiplier and compute its value. How does it depend on the reserve ratio? Negatively or positively?
(c) Suppose that the Fed injects $80 billion of new reserves into the banking system. Given the money multiplier computed in b.. how large would be the total change in money supply in the whole banking system?
(d) Briefly, give the two main reasons why the formula you have used in b. and c. overestimates the actual size of the money multiplier.
2. Suppose the Fed's target for the federal funds rate moves from 0.5% (current value) to 2%. Using the appropriate graphs carefully explain:
(a) How can the Fed attain such increase in the FFR.? HINT: you have to use the graph for the (interbank) market of reserves
(b) What is the impact of such change on total spending in the economy? HINT: you have to use the graph with the total expenditure and the 45 degree line.
(c) What is the impact on equilibrium output Y and the price P? HINT: you have to use the AD-AS graph to be larger or smaller than the initial $100 billion? By how much?
Part 2:
1. Consider an economy with a reserve requirement p, 0.25, and assume that banks, on average, some excess reserves. The value of the money_.multiplier will be
(a) equal to 4
(b) larger than 4
(c) smaller than 4
(d) zero. since there are excess reserves in the system.
2. For given increase in the supply of reserves to banks by the Fed, the drop in the federal funds (FFR.)
(a) is larger the more sensitive to the FFR the demand for reserves (by banks) is
(b) is larger the less sensitive to the FFR the demand for reserves (by banks) is
(c) does not depend on how sensitive to the FFR the demand for reserves (by banks) is
(d) is equal to the total change in the supply of reserves
3. The Federal Reserve is an independent institution in the sense that:
(a) The Fed implements monetary policy regardless of the current state of the US economy
(b) The Fed implements monetary policy without interference from the federal government
(c) The Fed appoints its governing body without interference from the federal government
(d) The Fed does not take into account fiscal policy when choosing what monetary policy to implemer
4. An increase in money supply by the Fed (via an increase in the supply of reserves to tanks) is most successful wken
(a) the demand of reserves by banks is steeper
(b) consumption and investments are more sensitive to interest rate changes
(c) the AS curve is flatter. (that is, when firms prefer not to change prices)
(d) all of the above c,onditions are realized.
5. Can monetary policy have some impact on the government fiscal budget?
(a) Yes, because the Fed increases (7 during an, expansionary fiscal policy
(b) No, because the Fed does not control Tor G
(c) Yes because the Fed can issue T-bills/bonds
(d) Ye-s because monetary policy affects output Y, which eventually affects- tax revenues
6. When the Fed implements a contractionary monetary policy this means that:
(a) the price of T-Bills rises
(h) the interest rate paid on T-Bills falls
(c) the Federal Funds Rate increases
(d) none of the above
7. The risk premium is
(a.) the interest rate paid on TI-easury bills/bonds
(b) the interest rate on a risky asset
(c) the difference between the interest rate on a risky asset and the interest rate on riskless Treasure bonds/bills
(d) the risk that the borrower might not pay in full or in time
8. The Fed pursues a contractionary monetary policy by
(a) decreasing the federal funds rate through an open market operation
(b) increasing taxes and cutting spending
(c) decreasing the reserve ratio
(d) increasing the federal funds rate through an open market operation
9. Which of the following would not be considered a conventional monetary policy by the Fed:
(a) selling T-Bills
(b) purchasing Mortgage Bonds
(c) lowering the discount rate
(d) changing the reserve requirement
10. A decrease in the reserve requirement in can lead to
(a) a decrease in the supply of reserves, hence a higher federal funds rate
(b) no change in the federal funds rate, as the supply of reserves is unaffected
(c) an increase in the supply of reserves, hence a lower federal funds rate
(d) more deposits in the banking system, but no effect on the federal funds rate