review_exam_soln - REVIEW EXAM SOLUTIONS 2 BANKs QUESTION...

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Unformatted text preview: REVIEW EXAM SOLUTIONS 2 BANKs QUESTION FED is making a transaction with the first bank to contract money supply, and the amount of this transaction is $10M. Reserve ratio is 10%. In order to contract money supply, FED sells GS to Bank 1 In Bank 1 second box - GS will increase to 90 - R will decrease to 10 (bank 1 uses $10M from its reserves to buy GS) - L will stay same - DD will stay same In Bank 1 third box - DD is 200, and the bank should hold 10% of DD in R, so R will increase to 20 - GS will stay at 90 - In order to compensate the increase in R, loans will decrease to 90 (meaning that Bank 1 will call bank loans in $10M value, and we are going to assume that the people whose loan is called back has money in Bank 2, and they withdraw their money in Bank 2 and pay their loan to Bank 1) In Bank 2 second box - People withdrew their money to pay Bank 1’s loans. This withdraw will decrease R and DD by $10M - R will decrease to 10 - DD will decrease to 190 - GS will remain the same (80) - L will remain the same (100) In Bank 2 third box - DD is 190, and the bank should hold 10% of DD in R, so R will increase to 19 - GS will stay at 80 - In order to compensate the increase in R, loans will decrease to 91 (meaning that Bank 2 will call bank loans in $9M value) Note that, the sum of assets and sum of liabilities should be the same in every box. You can check your work by looking to this equality. 1 BANK – 2 PERIODS QUESTION...
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This note was uploaded on 04/23/2008 for the course ECON 304L taught by Professor Staff during the Spring '07 term at University of Texas at Austin.

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review_exam_soln - REVIEW EXAM SOLUTIONS 2 BANKs QUESTION...

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