# HW3KEYpdf - Homework#3 Key 1 Consider the following balance...

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Homework #3 Key 1. Consider the following balance sheet. All figures are millions of dollars. Assets Liabilities Reserves 100 Deposits 1000 Loans 800 Net worth 100 Bonds 200 Suppose the Federal Reserve buys \$100 worth of bonds from this bank. Assume the required reserve ratio is 5%. a. Illustrate the initial change in the balance sheet. Bonds decline by 100 and reserves increase by 100. b. Can this bank make any new loans? How much? Yes, 150. Note the bank started with excess reserves of 50. c. If banks make as many loans as possible and the public does not change their currency holding, by how much will the money supply increase as a result of this open market operation? Identify the final balance sheet values. Hint: use the formula. The money multiplier is 20. The change in reserves is 150 (the amount of excess reserves the bank started with after the bond sale). The money supply will increase by 3,000. Deposits and loans will both increase by 3,000. d. How does your answer to part c change if the currency-deposit ratio is 50%? The money multiplier is now 2.73. The money supply will only increase by 409.10. e. Why would the Fed want to buy the bonds from the bank? To reduce interest rates. 2. In the bank, deposits are 5,000, reserves are 1,000, bonds are 1,000, and loans are 3,000. The required reserve ratio is 10%. a. Set up the balance sheet for the banking system. Assets are reserves, bonds, and loans. Deposits are liabilities. b. Excess reserves are __ 500 _____. Note that required reserves must be 20% of deposits.

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