e202s7t2ans - Eco 202 Test 2 Name_ 30 March 2007 Please...

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Eco 202 Name_______________________________ Test 2 30 March 2007 Please write answers in ink . You may use a pencil to draw your graphs. Allocate your time efficiently. Good luck and don’t enjoy your spring break too much. 1. a. Draw a simple T-account for First Terrier Bank (FTB), which has $20,000 of deposits, a required reserve ratio of 10 percent, and excess reserves of $800. Make sure you balance sheet balances. First Terrier Bank Assets Liabilities Reserves 2,800 Checkable Deposits 20,000 Treasury Bills 4,200 Loans 13,000 Total Assets 20,000 Total Liabilities 20,000 b. Assume that all other banks hold only the required amount of reserves. If First Terrier decides to reduce its reserves to only the required amount, by how much can it increase lending? $800 c. As a result of this loan, what is the potential increase in the quantity of money? D = 1/r * R D = 10 * $800 = $8,000. d. Now assume that the Fed purchases a $2,000 Treasury Bill from FTB? What happens to First Terrier’s level of excess reserves? It increases by $2,000, which means it can increase its lending by $2,000 e. How much can First Terrier lend after the Fed’s purchase? What is the potential increase in the quantity of money as a result of the Fed’s purchase? D = 1/r * R D = 10 * $2,000 = $20,000.
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2. During the early 1930s there were a number of bank failures in the United States. What did this do to the money supply? The New York Federal Reserve Bank advocated open market purchases. Would these purchases have reversed the change in the money supply and helped banks? Explain. Bank failures cause people to lose confidence in the banking system so that deposits fall and banks have less to lend. Further, under these circumstances banks are probably more cautious about lending. Both of these reactions would tend to decrease the money supply. Open market purchases increase bank reserves and so would have at least made the decrease smaller. The increase in reserves would also have provided banks with greater liquidity to meet the demands
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e202s7t2ans - Eco 202 Test 2 Name_ 30 March 2007 Please...

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