APEC 3006 Assignment 2 Yan Li 1. 4-2 a. When the Fed buys bonds in the open market, monetary base increases, and money multiplier stays the same. Consequently, money supply increases. b. When the Fed increases the interest rates, money multiplier decreases, because both the people and the banks want to hold more deposit in their accounts. Monetary base stays the same, and consequently, money supply decreases. c. When the Fed reduces its lending to banks, monetary base decreases. Money multiplier stays the same, and consequently money supply decreases. d. Money multiplier decreases due to the affect of rumor. Monetary base stays the same, and consequently money supply decreases. e. Monetary base increases, money multiplier stays the same and the money supply increases. 2. a. Assets=10,000,000, and leverage ratio is 10, so: the liability=9,000,000. Capital=1,000,000 Assets Liabilities and Owner’s Equity Reserves: 2,000,000 Deposits: 7,000,000 Loans: 5,000,000 Debt: 2,000,000 Securities: 3,000,000 Capital 1,000,000 b. Owner’s equity will increase 5%. c. Owner’s equity=capital=1,000,000, which is 10% of the assets.