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Unformatted text preview: University of California, Davis ECN 135 - FALL 2010 - Problem Set 4 Due Date: Thursday, December 2 Problem 1: Why might the procyclical behavior of interest rates (rising during busi- ness cycle expansions and falling during recessions) lead to procyclical movements in the money supply? Problem 2: Considering that rising reserve requirements to 100% makes complete control of the money supply possible, Congress should authorize the FED to raise reserve requirements to this level. Discuss this statement. Problem 3: For simplicity, throughout this question assume that the only players are the FED and commercial banks. Suppose that the FED requires the banking system to hold 20 billion dollars of reserves (required reserves=RR=20 billions). The excess reserves demanded by commercial banks are given as follows: If the federal funds rate, i F , is greater than 20% then the demand for excess reserves is zero. If i F is less than 20% and above i R = 5%, then the demand for excess reserves is Q ER = 40- 200 i F , As i F reaches i R = 5%, the demand for reserves becomes perfectly elastic, like we explained in class. Moreover, in this economy the non-borrowed reserve supply is 30 billion dollars, and the discount rate is i...
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This note was uploaded on 03/03/2011 for the course ECN 135 taught by Professor Geromichalos during the Fall '10 term at UC Davis.
- Fall '10
- Interest Rates