032 Group 2

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Jan 9, 2024

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+E)CON°U&'A ± Week ±± recitation Your names! Samantha Young² +Eva (Boyes² Laila Goodman² Savannah Tang² Natalie )Chan² &'Alisha *Dookhie If your name here differs from your name on (Brightspace² please notify the grader using the comment box on (Brightspace³

Part °: Keyword review Instruction: Write down economics terms that correspond to each of the following sentences± ● Jill works for an ice cream shop and earns her salary² which she puts in her checking account³ Here² money serves the role of store of value³ +Every day² elementary school students buy ice creams from her with cash³ Here² money serves the role of a medium of exchange³ +Each ice cream yields her a gross profit of ´µ² and her monthly expense is ´µ²¶¶¶² so she knows that she needs to sell at least ±²¶¶¶ ice creams each month³ Here² the money serves the role of a unit of account³ ● Money that has intrinsic value is called commodity money² whereas fiat money is money that is backed by government decrees³ ● True or false$% )Currency is a part of Mµ$% true ● True or false$% Money market mutual funds are a part of M±$% false ● In a balance sheet² a firm’s equity must be equal to its assets minus liabilities³

● In a bank’s balance sheet² deposits are classified as liabilities² while loans are classified as assets³ ● If banks hold a fraction of R of their deposits as reserves² the money multiplier is ±·R³ ● The bank’s capital is classified as equity in the bank’s balance sheet³ ● The leverage ratio is the ratio between the bank’s assets and capital³ &'A bank’s capital is less sensitive to changes in asset prices if the leverage ratio is low³ ● The Federal Reserve is the central bank of the United States³ ● The FOM)C meets about every ¸ weeks in *D)C to discuss the economic condition and consider changes in monetary policy³ ● If the Fed wants to increase the money supply² it purchases government bonds² lowers the discount rate² decreases the required reserve ratio² or decrease the interest on reserve balances³ ● When the Fed buys bonds² the fed funds rate decreases³ ● The Fed may not precisely control the money supply because households may hold currency² and banks may hold excess reserves³

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Part ²: Monetary policy and the ²³³!8 financial crisis Go to the Federal Reserve (Bank of St³ Louis ¹a³k³a³ FR+E*D º website³ Search for data on the fed funds rate ² total monetary base ² reserve balances ² and Mµ ³ Pay attention to changes during the µ¶¶» financial crisis³ &'Answer the following questions³ ● Fill numbers in the table below³ Pay attention to the units December ²³³ 7 December ²³³!8 Fed funds rate ¹¼º ½³µ½ ¶³±¸ Total monetary base ¹billion US*Dº »¾¿³µ ±²¸¸¸³½ Reserve balances ¹billion US*Dº ±½³ ¿»»³¶ Mµ ¹billion US*Dº ¿²½¿±³¸ »²± µ³±

● What kind of open market operation did the Fed do during the µ¶¶» financial crisis$% *During the crisis² the Fed put public funds into the banking system to increase the amount of bank capital³ They then imposed capital requirements³ ● What happened to the total monetary base in µ¶¶»$% The total monetary base increased drastically in the last ½ months of µ¶¶»³ ● What happened to the money supply as measured by Mµ in µ¶¶»$% The money supply as measured by Mµ increased steadily in µ¶¶»³ ● What could be the reason for such changes$% The Fed artificially pumped billions of dollars from public funds into the banking system³ ● In µ¶¶»² the Fed began paying interest on banks’ reserve balances³ What’s the effect of this$% The bank received more money supply due to the interest³

Part ´: Bank’s balance sheet See the balance sheet of JPMorgan )Chase in µ¶µµ ¹see P*DF if blocked by the paywallº³ Fill out the table below and answer the questions on the next slide³ Assets Amount ¹mil³ US*Dº Liabilities µ Equity Amount ¹mil³ US*Dº )Cash À due from banks ¹reserveº Á¾²¶ ¿ Total deposits µ²¾½¶²±¿ Investment ° Total µ²±µ±²±¾µ Total debts Á¸¾²µ » Net loans ±²±±±² Á± +Everything else ½¸ ² ¾½ +Everything else ¾¿ ²Á¸¾ Total liabilities ¾²¾¿¾²½±± Total equity µ µ²¾¾µ Total assets ¾²¸¸Á²¿½¾ Total liabilities µ equity ¾²¸¸Á²¿½¾

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● )Compared to the total deposits² what percentage of the deposits does )Chase lend out as loans$% What percentage of the deposits does )Chase keep as a reserve or use for other purposes$% ±²±±±² Á± · µ²¾½¶²±¿ $"# ½¿³Á±¼² meaning it keeps Áµ³½ ¼ as a reserve or use for other purposes ● Suppose that the loaned°out deposits are the only mechanism in the money supply generation³ What is the money multiplier ¹assuming that other banks also behave like )Chaseº$% ±·R $"# ± · ¶³Áµ½ $"# ±³ ● If the Federal Reserve buys ´±¶¶ billion worth of bonds² what happens to the money supply$% The Fed’s purchases increases the money supply³ The money supply will increase by ´±¶¶ Â ±³ ¶ $"# ´± ¶ billion ● What is the leverage ratio of )Chase$% ¾²¸¸Á²¿½¾ · µ µ²¾¾µ $"# ±µ³Á½ ● If the market value of )Chase’s investment value falls by ±Á¼ while everything else remains the same² what happens to the equity$% Investment is an asset² and equity $"# asset ° liability² so the equity would fall as well³ ±Á¼ decrease in investment value is ¾±»±¿¶ ¹$"# µ±µ±±¾µ Â ¶³±Áº which is »³¸»¼ of the total asset value³ The capital will then decrease by »³¸»¼Â leverage ratio ¹±µ³Á½º $"# ±¶»³»½² which would leave )Chase insolvent

Part ¶: News analysis Read this Investopedia article about Silicon Valley (Bank³ &'Also² see the bank’s balance sheet in µ¶µµ from Yahoo Finance and WSJ ³ ¹Tables and figures from this report by the Federal Reserve are also helpful² but the analysis is a little bit too technical³º Make a slide to tell a story about this bank and its collapse³ Things you should consider include risk management² asset portfolio² the leverage ratio² terms of liabilities and investment² and the intervention by the F*DI)C³

Silicon Valley (Bank² shut down by federal regulators in March of µ¶µ¾² heightened fears of the US entering a recession³ SV(B was intervened late by the F*DI)C because of the µ¶±» )Consumer Protection &'Act signed by former Pres³ Trump² which meant that banks with less than µÁ¶ billion dollars ¹used to be less than Á¶ billionº would not receive F*DI)C oversight and rules³ SV(B had less than this new threshold amount and therefore didn’t receive oversight earlier on³ Timeline! Prior to the collapse ° creation in ± »¾² public in ± »»² and major recent growth between µ¶± and µ¶µµ ¹tripled in size during the pandemicº → became the ±¸th largest bank → *During this time² the *Dodd°Frank act was repealed³ ° Used excess deposits to buy treasury bonds with relatively low returns Ã low risk )Collapse ° Many silicon valley companies hit financial troubles and withdrew deposits ° Their bonds became riskier investments when the Fed increased interest rates due to inflation ° Investors could buy elsewhere for higher interest rates ° SV(B’s clients also saw “financial troubles” which led them to withdraw their funds ° (Because of this² SV(B sold some of its investments² but the sales were a loss of ´±³» billion ° On March th µ¶µ¾ SV(B Financial Group stock crashed at market opening² and the next day federal regulators took over its operations² looking for buyers² which was unsuccessful³ ° SV(B Financial Group² the bank’s parent company² filed for bankruptcy on the ±¿th &'A lot of funds were uninsured² but depositors were shielded from losses³ Investors² however² may not get their money back

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