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Money and Banking

Money and Banking

1. Suppose that the required reserve ratio is 8.33%. If the Fed sells $400 million of bonds to the First National Bank. What happens to reserves and the monetary base? What will happen to the money supply? Show the changes in First National Bank’s balance sheet, The Federal Reserve’s balance sheet, and the collective banking system’s balance sheet.

2. During Christmastime, when the public’s holding of currency increase, what defensive open market operations typically occur?Why?
3. Suppose that the required reserve ratio is 6.25%. If reserves in the banking systemincrease by
$3.5 billion as a result of discount loans of $3.5 billion, why isn’t the banking systemin equilibrium?What will continue to happen in the banking systemuntil equilibriumis reached? Show changes to the banking system’s balance sheet.

4. Ifthe fed decides to use open market operations to raise the interest rate what will it do? Be specific about who within the federal reserve system makes the decision, and who else is involved in the process.

5. If the fed decides to use discount policy to increase the money supply what will it do? Be specific about who within the federal reserve system makes the decision, and who else is involved in the process.

6. Suppose that a bank has assets: some required reserves, some excess reserves, some loans, and some securities. If they change their strategy, by how much can they increase their loans?
7. If a bank buys $70 million of bonds fromthe Fed and also borrows $100 million fromthe discount window, what will be the effect on the level of checkable deposits?

8. In 2008 the Fed began paying interest on reserves. What do you think happened to the level of excess reserves after this change was made?

9. If the Fed raises the discount rate what effect will this have on the monetary base and on the money supply?

10. Read the Wall Street Journal article “Fed Takes Foot Off the Gas”. Write a one paragraph summary ofthe article. What are the two actions the Fed is warning that it will take in the months after the press conference?

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