Text: E002 - Topic 07 - Assignment
In this assignment, you will have the opportunity to practice the material covered in Greenlaw, Chapter 12. You will upload a PDF document of your work. You may utilize Word, Excel, or handwrite your answers. The point value is next to each problem.
(3 pts) Should banks have to hold 100% of their deposits? Why or why not?
(5 pts) Imagine that you deposit $40M into Bank of America (if you do, please remember me and give me a couple grand… thank you). The RR is 10%. Show the multiplier for 4 banks. Perform the same analysis but, this time, use an RR of 5%. What happens when the RR is reduced?
(2 Pts) Explain what would happen if banks were notified that they had to increase their required reserves by one percentage point from, say, 9% to 10% of deposits. What would their options be to come up with the cash?
(3 Pts) Suppose the Fed conducts an open market sale by selling $10 million in Treasury bonds to Farmers Merchant Bank. Sketch out the balance sheet changes that will occur as FMB restores its required reserves (10% of deposits) by reducing its loans. The initial balance sheet for FMB Bank contains the following information: Assets – reserves 30, bonds 50, and loans 250; Liabilities – deposits 300 and equity 30.
(2 Pts) If GDP is 1,500 and the money supply is 400, what is velocity? If GDP now rises to 1,600, but the money supply does not change, how has velocity changed?