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e202et2a - Principles of Macroeconomics Test 2 Name 29...

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Principles of Macroeconomics Name_______________________________ Test 2 29 March 2006 100 points. Each question is worth 25 points, so allocate your time efficiently. Please write answers in ink. You may use pencil for drawing graphs. Enjoy Spring Break. 1. Illustrate in the T-account below, the effect of an open market purchase of a $20,000 Treasury bill by the Federal Reserve System from the First Terrier Bank. First Terrier Bank Assets Liabilities Reserves $ 25,000 Checkable Deposits $250,000 45,000 Treasury Bills 60,000 40,000 Loans 165,000 a. Complete the T-account by writing in the entries as they would appear as the result of the Fed's purchase. Note: Not all items in the balance sheet above must change in value. b. After the purchase of the Treasury bill by the Fed, can the First Terrier Bank (FTB) safely lend if the required reserve ratio (r) is 10 percent, and the loan is deposited in another bank? If yes, how much can FTB lend? If no, how many loans must FTB call in to meet its reserve requirement? FTB can lend $20,000.
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