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07f101ps7solutions_retype - Princeton University Economics...

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Princeton University Professor E. Bogan Economics 101 Fall 2007 Problem Set 7 Solutions 1. Assets Liabilities & Net Worth $1 million (home equity) $10 million (Sony equity) $10,000 (checking account) $100,000 (money market) $500,000 (home mortgage) $2 million (loan from broker) $10,000 (visa bill) Net Worth: $8.6 million 2. A. The initial effect is a $1000 decrease in reserves, shrinking the required reserves by $200 and leaving an "excess" reserve of negative $800. My Bank -$1000 (reserves) -$1000 (withdrawal) B. Our bank is now $800 deficient in reserve holdings. C. The $800 loan is repaid, eliminating this bank's deficiency My Bank - 800 (loan) +$800 (reserves)
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D. The $800 loan repayment makes another bank deficient by $800 (1-.2), or $640. This trickles through the system from bank to bank, until deposits eventually shrink by ($1000/.2) or $5000. Full Banking System -$1000 (reserves) -$4000 (loans) -$5000 (deposits) 3. A. Madonna sells the bonds and deposits the check at Chase. Assets Liabilities & Net Worth -10 million (securities) +10 million (deposit) Chase Bank receives the deposit and gets new cash from the Fed in exchange Assets
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