20072prbset3 - METU Department of Economics Econ 202...

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1 METU Department of Economics Econ 202 Macroeconomic Theory Instructors: Ebru Voyvoda and Şirin Saraçoğlu Teaching Assistant: Gizem Koşar 2007-2008 Spring Semester Problem Set 3 (OB Chapter 4) Questions marked with (*) are to be turned in as Homework, due March 21, 2008 ; recitation hour. PART A: Problems Question 1 : a) Show how an open market sale affects the Central Bank’s (CB) balance sheet and also the balance sheet of a commercial bank under the following cases. Assume that the Central Bank sells Treasury Bills (or, government bonds) worth 100 TRY. i) When the commercial bank is the purchaser of the bond sold by the Central Bank. ii) When the bond sold by the Central Bank is bought by an individual who will deposit it at a commercial bank. b) If the CB sells 100 TRY worth of bonds, the reserve ratio is 0.25, and people hold 50% of their money in the form of currency, by how much will the money supply decrease (or increase)? Explain the process of events starting with the CB’s sale of bonds to the final increase in money supply. c) Explain why the change in money supply in (b) is not equal to the change in the central bank (high-powered) money. Question 2 : Assume money supply is M = 750 billion TRY, total bank checkable deposits are D = 500 TRY and the reserve ratio is 10%. If the Central Bank purchases 30 million TRY worth of Treasury Bills (government bonds), what is the maximum amount by which total money supply could change? Why would the actual change in money supply probably be somewhat lower? (Assume no excess reserves held by banks). (*) Question 3 : Suppose the central bank engages in a 100 TRY worth of open market purchases. Explain the process by which the money supply increases, and calculate the final amount of the increase under each of the following cases (treat each case as
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20072prbset3 - METU Department of Economics Econ 202...

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