1- What is the difference between commodity money and fiat money? Is there a scenario you can think of that incentivizes individuals to hold commodity money instead of fiat money? 2- Suppose the Fed buys $1 million in Treasury securities from a commercial bank. What effect will this action have on the bank's reserves and the money supply? 3- A bank operates with reserves of $100, loans of $300 and securities of $100. The bank's only liability is deposits of $400 since it has zero debt. Further, assume that the bank's capital equals the difference between 'Assets' and 'Liabilities.' Calculate its leverage ratio. 4- List three actions the Fed can take to increase money supply. Briefly discuss why these actions affect money supply in the first place.

1- What is the difference between commodity money and fiat money? Is there a scenario you can think of that incentivizes individuals to hold commodity money instead of fiat money? 2- Suppose the Fed buys $1 million in Treasury securities from a commercial bank. What effect will this action have on the bank's reserves and the money supply? 3- A bank operates with reserves of $100, loans of $300 and securities of $100. The bank's only liability is deposits of $400 since it has zero debt. Further, assume that the bank's capital equals the difference between 'Assets' and 'Liabilities.' Calculate its leverage ratio. 4- List three actions the Fed can take to increase money supply. Briefly discuss why these actions affect money supply in the first place.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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8. Study Questions and Problems #8 Suppose the Federal Reserve's trading desk buys $500,000 in T-bills from a securities dealer, who then deposits the Fed's check in Best National Bank. Assuming that the required reserve ratio is 5%, complete the following table by showing changes in Best National Bank's balance sheet. Best National Bank Assets (Dollars) Reserves: Addendum: Changes in Reserves Actual reserves Required reserves Excess reserves Liabilities (Dollars) Checking deposits: Total liabilities Consider the money multiplier. The maximum increase in the money supply that can result from this open market transaction is
8. The reserve requirement, open market operations, and the money supply Consider a system of banking in which the Federal Reserve uses required reserves to control the money supply (as was the case in the United States before 2008). Assume that banks do not hold excess reserves and that households do not hold currency, so the only money exists in the form of demand deposits. To further simplify, assume the banking system has total reserves of $400. Determine the money multiplier as well as the money supply for each reserve requirement listed in the following table. Reserve Requirement Simple Money Multiplier Money Supply (Percent) (Dollars) 20 10 A higher reserve requirement is associated with a money supply. Suppose the Federal Reserve wants to increase the money supply by $200. Maintain the assumption that banks do not hold excess reserves and that households do not hold currency. If the reserve requirement is 10%,…
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23. Identify the four major methods the Fed uses to control the money supply. Give two examples of situations in which the Fed might use one of these methods and explain why that method is best for the given situation.
5. If reserves are scarce, how would the federal funds rate change (increase or decrease) if the Fed: 1) sells mortgage-backed securities 2) decreases the (minimum) reserve requirements 3) conducts overnight repo operations 4) conducts overnight reverse repo operations
5. Consider the T-table of the Bank of Boston. Suppose the Federal Reserve Bank buys an additional $2 million in government bonds from the Bank of Boston. Assume (1) the required reserve ratio is 10 percent, and (2) the Bank of Boston issues all excess reserves in loans (I.e., there are no excess reserves). The new money supply equals $ million. Submit Balance sheet of the Bank of Boston Liabilities -55,000,000 Checkable deposits +$5,000,000 Assets Government bonds Currency (= bank reserves) +$5,000,000 Loans $0
7. For each of the following statements, indicate whether it is correct by checking the appropriate box:a) A decrease in the legal cash flow coefficient (θ) allows commercial banks to grant more loans on the basis of the same amount of deposits, leading to an increase in the value of the money multiplier and therefore in the money supply in circulation in the economy;b) When the Central Bank conducts an open market operation, consisting of the purchase of Treasury bills, the money supply in circulation in the economy increases, all other things being equal;c) If the fraction of the money supply held in the form of fiat money is 25%, and if the legal tender coefficient (θ) is 20%, then the money multiplier is 2.5;(d) If the fraction of the money supply held in the form of currency is 20% and the legal cash flow coefficient is 25%, then the money multiplier is 2.5 ;e) None of the above statements is correct.
4) Listen If the money multiplier decreased from 20 to 4, then the Fed increased the reserve ratio from 5 percent to 8 percent. the Fed increased the fed funds rate from 5 percent to 8 percent. the Fed increased the reserve ratio from 5 percent to 25 percent. the Fed decreased the fed funds rate from 8 percent to 5 percent. Question 30 (1 point) )Listen The FOMC is able to increase the money supply when it buys US government securities. The increase will be larger, the larger is the reserve ratio. buys US government securities. The increase will be larger, the smaller is the reserve ratio. sells US government securities. The increase will be larger, the smaller is the reserve ratio. sells US government securities. The increase will be larger, the larger is the reserve ratio.
1. Which of these is a basic goal of the Federal Reserve System? a. export promotion b. zero interest rates c. a balanced federal budget d. full employment