HW4_ECON 201B_Autumn 2016 - Autumn 2016 ECON 201B Seunghan...

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1 ECON 201BAutumn 2016Seunghan Lee Homework 4 Problem Set(4% of total grades, Due by Dec. 8, 2016) Student Name: ________________________ Please answer the following questions. Q.1 corresponds to three points while other questions correspond to one point each. 1. Let’s analyze the effect of the open market purchase of a $5,000 Treasury bill by the Federal Reserve on AD curve step by step. Assume that the Federal Reserve bought the Treasury bill from a commercial bank. (1) The left panel below shows the T-account of the Federal Reserve just before the open market purchase while the right panel below shows the T-account of the Federal Reserve just after the open market purchase. Fill in the blanks in the right panel.
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) (2) The left panel below shows the T-account of the entire commercial banking system just before the open market purchase of the Federal Reserve while the right panel below shows the T-account of the entire commercial banking system after the open market purchase subsequently leads to an infinite round of loan-deposit process. Assume that the required reserve ratio is 0.2, all excess reserves are fully loaned out and all new loans are fully deposited back into the entire commercial banking system. Fill in the blanks in the right panel. Assets Liabilities Bank Reserves $15,000 Loans $60,000 Deposits $75,000 Assets Liabilities Bank Reserves $( ) Loans $( ) Deposits $( )
2 (3) Based on the increase in money supply you identified from the T-account of the entire commercial banking system above, fill in the blanks in the Liquidity Preference Model below. To calculate the amount of money supply, assume that there is no currency in circulation and all deposits in the T-account above are checkable bank deposits.

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