Question

Discussion Questions for Tuesday, Apr. 23 1. Suppose the Fed conducts $10 million open market purchase from Bank A. If Bank A and all the other banks use reserves to purchase only securities, what will happen to deposits in the banking system and how much does it expand? 2. Let's assume that in a hypothetical economy currency in circulation is $600 billion, the amount of checkable deposits is $900 billion, excess reserves are $15 billion and required reserve ratio is 10%. a. Calculate money supply, currency to deposit ratio, excess reserve ratio and money multiplier. b. Suppose Fed conducts very large open market purchase of $1400 billion due to a sharp recession. Assuming the ratios hold, what will be the effect on money supply? c. Now suppose the Fed conducts the same open market purchase as in part (b) except banks choose to hold all the proceeds as excess reserves. Assuming currency to deposit and required reserve ratios stay the same, what happens money multiplier and money supply? d. Can you draw parallels between part (c) and what happened during the financial crisis of 2008? 3. Classify each of the following as either a policy tool, an instrument or an intermediate target, and explain your choice. a. Open market operations. b. The ten-year Treasury bond rate c. The monetary base d. M1 e. The fed funds rate f. Discount rate.

Answer 1

느 Cro o.CT (兄 Ln

느 Cro o.CT (兄 Ln