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Unformatted text preview: HOMEWORK 2, Professor AlSabea, Econ 205 Name Camille Pagès___________________ TA Name Yusun Hwang___________________ 1) suppose a bank has the following balance sheet: If the required reserve ratio is 10 percent how much excess reserves does the bank have? what is the maximum amount that the bank can expand its loans? Bank should hold $10 000 at 10% ratio. It can expand its loan up to $94 000 2) Explain how a floating exchange rate can cause problems for countries that have a substantial number of foreign loans denominated in dollars. How might a fixed exchange rate pegged to the dollar help the country avoid these problems? Now most countries are under floating rate of exchange. However if they have a substantial number of foreign loans denominated in dollars, the changes in currency exchange rates could prove to be of significant different and add to its debt since its currency would be devalued. Essentially with the appreciation of the dollar, the other countries would have less buying power with their currency and their debt would have increased in terms of their currency. A fixed exchange rate pegged to the dollar could help the country avoid these problems by avoiding the risk of depreciation of their...
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This note was uploaded on 03/03/2008 for the course ECON 203 taught by Professor Al-sabea during the Fall '05 term at USC.
- Fall '05